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Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving

by Richard H. Thaler and Shlomo Benartzi (2004)

Lukas Vorwerk | Experimental and Behavioral Economics | June 25th 2015

Agenda

• 1. Introduction
• 2. Behavioral economics and saving
• 3. The SMarT program
• 4. Additional simulations
• 5. Conclusions

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 2

Goal: Design a program based on principles from psychology and behavioral economics to help people save more

• 1. Introduction

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 3

• No willpower or self-control

needed

• Employees have to actively

join and select their own savings rates

• Evidence: some employees

contribute little or nothing

Defined-benefit plan Defined-contribution plan Life cycle theory of saving

• 2. Behavioral economics and saving

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 4

• Determining the optimal savings rate is difficult
• Saving requires self-control
• Procrastination: tendency to postpone unpleasant tasks

Reasons for too little savings

• Hyperbolic discounting

 Time-inconsistent behavior  Weighing current and near-term consumption especially heavily Procrastination

• Status quo bias / inertia

 Tendency to like things to stay relatively the same

• Loss aversion

 Tendency to weigh losses significantly more heavily than gains

Behavioral factors

• 3. The SMarT program

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 5

• Time-lag between sign-up and first contribution to the plan as long as

possible

• Contribution to the plan is only increased after pay raises
• Contribution rate continues to increase on each scheduled pay raise until

a preset maximum is reached

• The employee can opt out of the plan at any time

Main elements

• Implemented in three firms
• Implementation varied between firms

 Interaction with financial advisor  One-shot mailing  Financial education seminars

• Particular design features vary as well

Implementation

• 3. The SMarT program (cont’d)

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 6

• High take-up rate rate
• Majority of participants remained in the plan (80%)
• Participants ended up with a much higher saving rate than the rest

Results: 1st implementation

• 3. The SMarT program (cont’d)

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 7

• Moderate take-up rates (13.4% &

26.5%)

• Low dropout rates at Philips (5.4%)
• Increasing in saving rates as

expected Results: 2nd & 3rd implementation

• 4. Additional simulations

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 8

• Calculations for hypothetical

workers

 Different age and income profiles  Including social security and savings through defined-contribution plans

• Replacement rates near 100%

assumed as adequate Savings Adequacy

• Representative data from

retirement saving administrators

• Calculations for three hypothetical

implementation strategies and different annual increments

• Many other assumptions on

dropout rates etc. Widespread adoption

• 5. Conclusions
• The first experiences with the SMarT plan have been

quite successful

 Relatively high enrollment rates

• Depends on the specific implementation strategy

 Low dropout rates  Great (but adequate) increase in saving rates

• Recipe for success: SMarT makes use of the same

principles that typically prevent people from saving

• Behavioral economics can be used to design effective

prescriptive programs for important economic decisions

Save More Tomorrow™: Using Behavioral Economics to Increase Employee Saving | L. Vorwerk | June 29th 2015 page 9

Thank you for your attention!

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