Save More Tomorrow : Using Behavioral Economics to Increase Employee Saving
Richard H. Thaler
University of Chicago
University of California, Los Angeles
As ﬁrms switch from deﬁned-beneﬁt plans to deﬁned-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the ﬁrst three implementations of the SMarT program. Our key ﬁndings, from the ﬁrst implementation, which has We are grateful to Brian Tarbox for implementing the Save More Tomorrow plan and for sharing the data with us. We would also like to thank many people at the following companies for their help: Financial Engines, Hewitt Associates, Ispat Inland, John Hancock, Philips Electronics, and the Vanguard Group. Jodi Dicenzo, Bill Sharpe, and Steve Utkus deserve special thanks. We are also grateful for comments from David Laibson, Brigitte Madrian, Casey Mulligan, Ted O’Donoghue, and Cass Sunstein. Benartzi would like to thank Reish Luftman McDaniel & Reicher for ﬁnancial support. Save More Tomorrow is a registered trademark of Benartzi and Thaler, but the plan is available at no charge to any company that is willing to share data on the outcomes. This paper is dedicated to Sherwin Rosen, Thaler’s thesis advisor. Thaler would not be an economist today if not for Rosen’s help. The usual disclaimer, assigning none of the blame for errors to those thanked above, applies in spades to Sherwin. He would not have liked this paper much, but we sure would have enjoyed hearing him complain about it! [Journal of Political Economy, 2004, vol. 112, no. 1, pt. 2] 2004 by The University of Chicago. All rights reserved. 0022-3808/2004/11201S1-0018$10.00
been in place for four annual raises, are as follows: (1) a high proportion (78 percent) of those offered the plan joined, (2) the vast majority of those enrolled in the SMarT plan (80 percent) remained in it through the fourth pay raise, and (3) the average saving rates for SMarT program participants increased from 3.5 percent to 13.6 percent over the course of 40 months. The results suggest that behavioral economics can be used to design effective prescriptive programs for important economic decisions.
Economic theory generally assumes that people solve important problems as economists would. The life cycle theory of saving is a good example. Households are assumed to want to smooth consumption over the life cycle and are expected to solve the relevant optimization problem in each period before deciding how much to consume and how much to save. Actual household behavior might differ from this optimal plan for at least two reasons. First, the problem is a hard one, even for an economist, so households might fail to compute the correct savings rate. Second, even if the correct savings rate were known, households might lack the self-control to reduce current consumption in favor of future consumption (Thaler and Shefrin 1981). One fact that underscores the important role of self-control is that the typical middle-class American household accumulates retirement wealth primarily in three forms: social security, pensions, and home equity. Neither social security nor deﬁned-beneﬁt pension plans require willpower on the part of...
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