September 4, 2008
By Stuart M. Butler, Ph.D.
Americans don't save anymore. The U.S. savings rate actually
went negative in 2005 -- the first time that's happened since the
Failure to save is particularly risky for those with modest or
low incomes. They have no cushion for sudden needs -- like
emergency medical or car-repair bills. They have greater difficulty
keeping pace with sudden price increases. (It was Americans with
little to no savings who got lured into no-down-payment
And they build no nest egg for retirement.
But how do you get people to save? It's typically not that they
lack funds. Even households earning less than $13,000 "invest," on
average, 9 percent of their income in lottery tickets. They just
don't choose to save it.
Ads promoting saving don't seem to work. Employers find it hard
to get people to sign up for 401(k)s. Tax incentives spur saving
among the affluent, but have little impact on people who don't pay
much in tax anyway.
A group of researchers -- drawn from disparate think tanks and
universities like the Brookings Institution, the Heritage Foundation and
Georgetown University -- are promoting a simple but creative idea
to reverse the dismal savings trend: "auto-enrollment."
It's based on a blend of economics and psychology, known as
"behavioral economics," which recognizes that people often make
decisions based more on habit and human nature rather than on
Basically, the idea is to change the default for saving from
opting-in to opting-out. So instead of having to decide consciously
to save at your place of work, you would be automatically enrolled
in a saving plan unless you consciously decide not to save and take
steps to opt out.
This could substantially increase saving by relying on
behavioral inertia. We tend to just go with the flow. That's why
having default withholding of taxes at the workplace leads most
people to put aside enough for their taxes each year -- often more
than enough. People essentially can opt out of tax withholding and
pay little before April 15th. But they usually don't do that.
It's also why car-rental agencies can get so many of us to buy
supplemental car insurance we don't really need. You can avoid
buying the insurance just by initialing a few spaces on a form, and
your bill would be lower. But an amazingly high number of people
just go along and pay more. That's human nature.
These behavioral realities contribute to the savings problem,
but also give a clue to the solution. Research indicates that
getting people to opt in to savings plans is an uphill struggle.
You can hold seminars, telling people how much they will gain from
regular savings. People will commit to save. They will take the
forms. They will intend to sign up. But most never get around to
The research also shows that if people are signed up
automatically in a savings plan - with money taken out of their
paychecks - and then told that they can fill in a form to opt out,
most just never get around to opting out.
Even more significant, a leading study found the enrollment rate
leaps from just 13 percent to a staggering 80 percent among
savings-starved lower-income workers (those earning below
Working together in an organization called the Retirement
Security Project, an ideologically diverse group of think tank
analysts has used this important research about human nature to
craft a concrete proposal for an "automatic" individual retirement
Under the proposal, companies that sponsor retirement plans
would get a new, temporary tax incentive to set up an
automatic-enrollment system for their employees. The employer tax
break would cover the start-up costs, while employees would enjoy
the long-term tax benefits of IRA-type savings plans.
The automatic enrollment would channel employee money and any
employer matching contribution into the IRAs. Employees could
specify a particular IRA, but if they do nothing, the money would
go into a low-cost default IRA.
What are the odds of this potentially dramatic boost to savings
becoming law? Very good.
Already, bipartisan legislation has been introduced by key
members in the Senate and the House. Groups like AARP and the
Minority Business Roundtable backed the proposal. And both
presidential candidates, Sen. Barack Obama and Sen. John McCain,
have endorsed the concept of automatic enrollment.
It's a breathtakingly simple idea that everyone can be for, and
it would make a huge difference to the economic prospects of
millions of Americans.
Butler is vice president for domestic policy issues
for the Heritage Foundation (heritage.org).
First appeared in the Washington Times
Americans don't save anymore. The U.S. savings rate actually went negative in 2005 -- the first time that's happened since the Great Depression.
Stuart M. Butler, Ph.D.
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