Saturday, February 21, 2009

New Ways to Help People Save

As I have pointed out in previous posts, it is not easy for people to save. There are many barriers that prevent us from saving. Some are really hard to overcome, such as the size of our income, having a large family, or being hit with unexpected expenses. But other barriers may be reduced or even eliminated. I learned a lot about saving decisions in an initiative I did (together with other co-authors) here at Dartmouth College. Our aim was to foster participation in the Supplementary Retirement Accounts (SRA) that Dartmouth offers but that many employees do not take advantage of. We conducted focus groups and in-depth interviews and distributed surveys to enable us to hear what employees had to say about their savings. It was a humbling experience. It is remarkable and exciting to see how smart people are about their objectives and how articulate they are about what is important to them. On the other hand, there was a gulf between what people aimed for and their perceived ability to get there. We heard over and over, “I am not a sophisticated investor,” and “I do not know where to start.” We thought we could do something about that: we have Ph.D.s in this place and we could put them to use.

We provided a group of employees with a planning aid—a one page document—to help with saving in several ways. First, the planning aid provided the information that employees needed to set up an SRA, such as maximum and minimum contribution amounts and the list of the College’s pension providers. Second, it broke the SRA enrollment process into simple steps with an estimate of how much time each step would take. It also provided information about whom to contact for help, where computers would be available (the enrollment had to be done online), and how to avoid problems with the online registration timing out. Finally, the aid included a reminder about why it is important to save. We adhered to what the employees had told us over and over: they save for their family (I could not agree more; this is why I save, too), and we included a picture on the back of the planning aid of a family exchanging gifts.

We distributed the planning aid to new employees during employee orientation. Our objective was to provide information and facilitate decision making at the time decisions needed to be made. We also set up a method for evaluating this initiative. What good is a program if you do not know whether it works?

This simple and rather inexpensive aid proved to be very effective. The new employees who received the planning aid were more than twice as likely to participate in SRAs as those who were not exposed to the planning aid. This initiative was undertaken well before the onset of the current financial crisis and we do not yet know how the crisis will affect individuals’ decision to participate in an SRA. But our data collection process is continuing and we will soon find out.

There are a few things about this project that really resonate with me. I remember one focus group participant who told us about his dreams for retirement and how important it was for him to plan for retirement. Another, echoing so many others we interviewed, explained to us how her saving was shaped by the experience of her family. We asked one young man we interviewed over the phone what he would have liked to see done to help him save. He hesitated a little and then said, “You know, this phone call is already helpful.”

I have worked on many projects, written many papers, and worked with many data sets, but only with this project could I finally see and hear the depth and richness of individual stories about the importance of saving. The faces behind the numbers, the distinct reasons for saving or not saving, and the struggles behind people’s decisions became so vivid and have enriched my research work in a unique way.

There is not a simple way to help people save. But what I learned from this project is that simplification should not be undervalued, and we should not assume that people have all the necessary, basic information at their fingertips. I have also learned that people are very different and that those differences should be taken into account when devising saving initiatives. And there are simple things that can be done to remind people about the importance of saving, things as uncomplicated as a phone call.

If you are interested in reading a copy of the paper that describes this project, it is available on my web page at:

Sunday, February 8, 2009

The Return to Thrift?

The saving rate in the United States has increased in the past year. From zero or even negative values, the saving rate has now moved into positive terrain. Some have argued that we are witnessing a return to thrift. This may well be the case, but there are several reasons, according to the theory, why we are witnessing an increase in personal saving. First, saving is a forward looking-variable. According to the theory, saving should be high when income is expected to decrease in the future. Thus, what the current figures about saving may be telling us is the gloomy picture that most households have about the future. Second, saving serves not only to offset decreases in income, but also to insure against shocks. In the current economy, people may feel more uncertain about their future income. Consequently, the amount of precautionary saving may have increased. This is particularly true if people cannot rely on borrowing when facing shocks to income. Both the decrease in home equity and the high amount of borrowing that families are already carrying on their credit cards may indeed make further borrowing difficult or not possible. Thus families may be simply making provisions for a more uncertain future.

Uncertainty is not good for the economy as it depresses not only investment but also consumption. Thus, one way to boost consumption is to restore confidence about the economy and about the future (admittedly a difficult task).

But as families go through the hardship of the recession, buy on discount, and try to keep within their budget, there may be some learning about how to consume and save. In the traditional theory of saving, we assume that people make rather complex calculations to determine how much to save. In practice, only a minority of families seems to make plans and even fewer do any calculations to determine how much money to put aside. The future may seem far away and bad events hard to conceive if people have never experienced one. For example, in some of my research work, I find that people are more likely to understand the effects of inflation if they have lived through several inflationary episodes. Moreover, individuals are more likely to plan for retirement if they have witnessed their parents suffering health problems at an advanced age. Thus, the current crisis may end up affecting saving beyond what we expect from the pure theory and these effects may persist into the future.

Some have argued that thrift is a value that should be instilled into children and adults as well. I am not sure we need to be that sanguine. In the area of saving, as in other parts of life, it pays to plan and consider contingencies. That is the recommendation coming from basic economy theory. We can leave it like that!