NCPA - National Center for Policy Analysis

Plan to Increase Savings Yields Positive Results

May 7, 2004

Today, the U.S. personal savings rate is close to zero, spurring many economists to advocate higher levels of savings in order to generate economic growth. University of Chicago researchers suggest a new plan called Save More Tomorrow (SMarT) will offer a big step towards accomplishing this goal.

In order to increase savings, researchers say, plans must address three primary obstacles facing individuals: lack of financial education, procrastination, and self-control. Under the SMarT plan, employees gain access to an investment consultant to advise them of the program and of its benefits. Those who join the program increase their level of savings after each pay raise (limiting the perceived loss of income), gradually increasing the rate of contribution until it reaches a preset maximum. The results in test trials have been positive:

  • Participants joining the SMarT program increased their savings from 3.5 percent of take-home pay to 13.6 percent.
  • About 80 percent of participants remained in the program after four pay raises.
  • Conversely, those who declined to take up SMarT saw their savings remain flat at about 6 percent.

Applying the SMarT program nationwide, University of Chicago researchers estimate the rate of American savings would increase from 5.0 percent to 9.7 percent, netting about $125 billion in additional savings per year. Percentage-wise, this would amount to 1.5 percent of disposable personal income -- a substantial increase over current levels.

Researchers say the advantages of SmarT are two-fold. First, once people enroll in the plan, few opt out -- taking advantage of the same behavioral tendency that induces people to postpone savings. Second, unlike other approaches to increase savings, much of the gains from the SMarT program come from those who are saving little or nothing, thus generating almost all "new" saving.

Source: Richard Thaler and Shlomo Benartzi, "Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving," Journal of Political Economy, February 2004.


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