Save More Tomorrow (TM): Using Behavioral Economics to Increase Employee Saving
Abstract
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 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.Download Info
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Bibliographic Info
Article provided by University of Chicago Press in its journal Journal of Political Economy.
Volume (Year): 112 (2004)
Issue (Month): S1 (February)
Pages: S164-S187
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Web page: http://www.journals.uchicago.edu/JPE/
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As found by EconAcademics.org, the blog aggregator for Economics research:- Articles for Journal Clubs
by Liam Delaney in Geary Behaviour Centre on 2010-06-22 17:50:00 - Behavioural Economics and Guardian Readers
by Liam Delaney in Geary Behaviour Centre on 2008-07-19 13:02:00
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