How to induce more savings

by on December 20, 2004 at 7:06 am in Economics | Permalink

…it could be that Americans’ failure to save is caused by mechanics,
not morals. At least that is one conclusion of a recent paper by four
economists: David Laibson and James J. Choi of Harvard and Brigitte C.
Madrian and Andrew Metrick of the University of Pennsylvania.

The
scholars examined what happened at four companies that switched the way
they pitched 401(k)’s to employees. When employees were offered the
option of signing up for a 401(k) upon hiring, participation rates
after six months ranged from 25 percent to 43 percent. Not bad. But
when the same companies instituted default enrollment – people were
automatically enrolled in the plan when hired but could opt out –
participation rates after six months were 86 to 90 percent. In other
words, changing the position of the on-off switch essentially doubled
the rate…

Professor Laibson suggests other possible uses of default mechanisms
to increase national savings. For example, what if income tax rebates
were automatically channeled into individual retirement accounts,
unless people chose to opt out?

So even if the bad news is that
we don’t save enough, even with all the vehicles and tax breaks,
there’s still some good news. To increase savings, we don’t have to
engineer a fundamental transformation of the American character.
Instead, we may just have to tweak the institutional levers that have
the effect of channeling cash in different directions.

As Professor Laibson said: "People will save if it’s on the path of least resistance."

Here is the full New York Times story.  Here is the original research.  On the other hand, this paper says that eighty percent of Americans are saving an optimal amount, Arnold Kling offers useful commentary and critique.

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