Good Behavior- Savings Policies for the Real World

Good Behavior- Savings Policies for the Real World

Retirement Planning Concept ChartAsk any American about financial priorities and there is a good chance retirement savings will be at the top of the list.  Countless surveys, polls, and studies show that people are concerned about their financial futures and know that they need to save for a secure retirement.  So why are personal savings rates trending toward historic and abysmal lows?

As policymakers look to encourage and promote personal savings, it is critical that they understand how people make financial decisions and what policies will actually lead to greater savings.

Over the past few decades, the study of behavioral economics has given us a wealth of information and critical insights into how people make financial decisions in the “real world.”  Financial incentives, motivation, education, and knowledge – all the things you would think would drive a person to save more – do not necessarily result in more personal savings.

Fortunately, we have a policy framework that has provided researchers with significant insight into savings behavior.  In 2006, Congress enacted the Pension Protection Act (PPA).  Among other things, the PPA permitted plan sponsors to provide for automatic enrollment, automatic default contributions, and automatic deferral increases.  Intentionally or not, policymakers recognized behavioral economics which showed, broadly speaking, that people’s savings behavior trends toward the “path of least resistance.”  Essentially, they take the easiest route.  This has been borne out by data demonstrating a tendency to passively accept the default options in employer-provided retirement savings plans.

But by accepting default options, savers are choosing minimal contributions that are unlikely to be of much help in achieving a more secure retirement.  Some plan sponsors have sought to address this behavioral issue by providing for automatic increases to the minimum contribution, unless employees opt out.  Data has shown that employees tend to passively accept the modest deferral increase and, as a result, save more.

What this suggests is that policymakers should not focus exclusively on educating and incentivizing individuals to save.  Incentives to individuals are a cornerstone of America’s retirement system.  But a more holistic approach which includes addressing the savings structure and mechanisms is critical to helping Americans save for a secure future.

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