Let's Make it Easier to Save Money

Adam Rust

It turns out that we’d all be better off if we let our robots save for us.

Americans are not saving enough. It’s an under-the-radar slow-moving crisis that will ultimately explode when Generation X, Y, and the Millennials begin to retire.

In 2017, the average middle-aged American household had $250,000 in savings. That sounds reasonable enough, but only because of how the number is calculated and because of what factors go into the math behind that number. Averaging creates distortions. If you have one person whose has set aside millions for retirement, then that sum alone can make things appear favorable. For example, if four people have no savings and one person has $2 million set aside for retirement, the average savings is $400,000. Averaging would, in that scenario, convey the notion that workers were making progress. However, it would hide the fact that 80 percent of workers had no savings at all.

The Fed’s most recent report on savings tells the story through many different data points: 

·         One-third of workers with a job (not self-employed) have no savings at all.

·         18 percent of households put off dental care because they could not afford to pay for it (down from 24 percent in 2013).

·         63 percent of bachelor degree holders and 69 percent of those with a graduate degree, under the age of 29, have student loan debt.  Among those of ages between 30 to 44, the numbers were only slightly lower: 53 and 67 percent, respectively.

·         Nineteen percent of individuals over the age of 60 have no retirement savings at all.

·         56.7 percent of respondents said they if there were to lose their primary source of income, they would not be able to cover their expenses for three months – even if the options include the ability to borrow money. 15.7 percent said that if they had a $400 emergency expense, paying the cost would necessitate that they did not pay other bills.

Given these numbers, perhaps it isn’t surprising that 24 percent of people over the age of 65 are still working

Most people have no idea how much they need for retirement, and frequently, they couldn’t say how much they are likely to have given their current savings trajectory. The ad where the person says his retirement goal is “a kazillion dollars” is all too true.

 The Census Bureau reported that median US household net worth was $80,039. However, most of that wealth is tied up in the form of equity in real estate. It’s hard to rely on home equity for retirement, as short of selling a home or taking out a new mortgage. The alternative – to sell your home, is hardly advantageous. So while 63.2 percent of households own a home, the rest do not. While the average equity holding in a personal residence is $81,000, other people must rent. Not only do they lack equity, but they will have to continue to make rent payments even after they retire.

The next list outlines the percentage of American households who hold no wealth in a particular asset class:

·         Financial assets at a bank: 10.8 percent

·         A vehicle: 15.3 percent

·         Home equity: 36.8 percent

·         401 (k): 59.3 percent

·         IRA/Keough: 72.6 percent

·         Stocks or mutual funds: 80 percent

The median value of an IRA/Keough account is $1,100.

The net takeaway should be that any idea that has the promise of leading to greater wealth accumulation deserves a chance to be tested.

Picture of card
behavioral savings

Ever since the de facto retirement plan switched from “defined benefit,” where the amount of the pension payout is fixed, to “defined contribution,” where only the amount of the investment is certain, people have been under-contributing to their retirement.

Perhaps the core problem that must be overcome is this: saving isn’t much fun. It’s not fun, and the evidence suggests that it’s getting harder and harder to do. Maybe that is because we now live in a world where technology unites us with an opportunity to shop throughout our day. It used to be that a person had to seek out a store. Now, it’s the opposite. We have to resist come-ons all day.

For years, economists have worked from the assumption that savers were logical individuals who wanted to put their money to its most responsible use. The economists assumed that individuals would allocate current and future spending to its best use, given the time value of money and their lifetime spending needs.

I’m not sure how they managed to ignore what was happening outside of the ivory tower, but practitioners of the dismal science did, and as a result, consumer financial education always had a decidedly judgmental tone. Generally, mass-market messaging implored people to think long-term about savings. Some good ideas did materialize – the IRA and the Keough plans. However, it remained the case that underlying theory assumed that people would put off consumption today to benefit from a reward that wouldn’t come for decades into the future.

The mismatch between these viewpoints and actual consumer behavior became all too obvious in the latter half of the first decade of this century when subprime cash-out refinance mortgages enabled millions of Americans to borrowed aggressively to maximize their lifestyles.

By 2005, the personal savings rate dropped to its lowest point since the Federal Reserve began its tracking of the data in 1959. Today, the individual savings rate (2017) is only 3.4 percent of income. In the sixties and seventies, the national savings rate was almost always higher than 10 percent. The Fed’s research affirms our own worst suspicions: even with the additional motivation of real tax savings, only a quarter of American households have elected to start an IRA or a Keough.

As our collective behavior grew demonstrably worse, a new set of academics developed a new school of thought. It was grounded in a more cynical view of consumer behavior. The new work reflects three core assumptions about our financial behavior:

·         Because of problems with our self-control, we deviate from making optimal choices.

·         Individuals overweight the benefits of consumption in the short-term at the expense of their needs in the future.

·         Consumers have frames for making decisions, and frequently, they use perceived transaction costs to make choices that are not rooted in rational thinking.

However, notably, these economists were thinking about more than making better models. Their work has always made it a priority to translate research into marketplace solutions. If it’s hard to save but easy to spend, they contend, then why not look for ways to reverse the situation? Why not create technologies that no longer require us to decide to save? Why not make savings automatic, so that the only way to not save is to step forward to stop it from happening?

Some ideas:

·         Default retirement plan enrollment: Recognizing that many employees forget to sign up for their 401 (k) at work, some places now require a worker to ask to not be on the retirement plan, rather than the other way around.

·         Small-dollar, transaction-triggered transfers to savings: Some banks have developed auto-transfer options inside checking accounts. If you swipe your debit card, these services will automatically debit your spending account and transfer the sum to a savings account.

·         Raises-to-savings: If someone was balancing his or her budget before a raise, it stands to reason that he or she should be capable of increasing his or her savings once his or her pay goes up. Richard Thaler’s “save more tomorrow” scheme lets a worker designate a ratio of the incremental pay increase to a savings account. By consenting to a system that automatically redistributes half of the proceeds of a raise to a savings account, a small pay raise can put a worker on a better savings trajectory. 

·         Categorical saving: Would you feel better if every time you dropped a few dollars on your favorite vice (cigarettes, lattes, shoes), you also moved some cash into savings? By watching the bin codes associated with point-of-sale terminals, some apps will allow a person to contribute to savings whenever spending takes place within a designated vending category.

·         Carrots coupled with sticks: Could we do better at savings if failing to meet a goal led to a punishment? Why not strengthen that resolve by creating a penalty for failure? Dean Kaplan like to create “commitment contracts” that hold people accountable. If they do something positive, then they receive a reward. If they fail to honor their commitment, though, they agree to receive a punishment. I.E., Save $1,000 and earn the right to splurge at a restaurant, but fail and you must perform an unenviable task. 

·         Prize-linked savings: Millions of people play the lottery, even though everyone knows that the overall rate of return is less than zero. Research says that a large percentage of Americans believe that their best chance of creating a retirement nest egg is through the lottery. However, playing the lottery is fun. It’s a lot more fun than buying mutual funds. Perhaps part of the return is found in the fun of the scratch-off, and if so, why not reward people with a lottery ticket when they put money into savings? A caveat to this approach is that it has legal constraints: banks are not allowed to run lotteries. However, credit unions have not been held to the same restrictions, and some now participate in “Save-to-Win” programs. 

I believe that most of the winning solutions will rely on the smartphone. Things go to scale in the US when providers of a product derive a profit from doing so. It is tough to make money on a traditional savings account. Most banks look at a savings account as an add-on service whose costs must be cross-subsidized from the sale of other services. Regulatory requirements make a stand-alone branch-based savings program that much more untenable. 

The solution will come from mobile because digital technology reduces marginal operating costs. The provision of an app is almost costless. However, it’s not just the cost of operating an account. It’s also likely that the winning behavioral solution will integrate your lifestyle into the act of savings. The universe of If This Then That ("IFTTT") applets are designed for this possibility. Imagine if you could save set up your savings app to put a few dollars in your account every time you got a good night’s sleep? Integration between a savings account and a fitness tracker would make that possible. Buy a beer? Integrate with Untapped and it becomes a new habit. Send a tweet – IFTTT = savings.

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