Save More Tomorrow

Save More Tomorrow : Using Behavioral Economics to Increase Employee Saving

Richard H. Thaler
University of Chicago

Shlomo Benartzi
University of California, Los Angeles

As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has
We are grateful to Brian Tarbox for implementing the Save More Tomorrow plan and for sharing the data with us. We would also like to thank many people at the following companies for their help: Financial Engines, Hewitt Associates, Ispat Inland, John Hancock, Philips Electronics, and the Vanguard Group. Jodi Dicenzo, Bill Sharpe, and Steve Utkus deserve special thanks. We are also grateful for comments from David Laibson, Brigitte Madrian, Casey Mulligan, Ted O’Donoghue, and Cass Sunstein. Benartzi would like to thank Reish Luftman McDaniel & Reicher for financial support. Save More Tomorrow is a registered trademark of Benartzi and Thaler, but the plan is available at no charge to any company that is willing to share data on the outcomes. This paper is dedicated to Sherwin Rosen, Thaler’s thesis advisor. Thaler would not be an economist today if not for Rosen’s

References: Ainslie, George. 1975. “Specious Reward: A Behavioral Theory of Impulsiveness and Impulse Control.” Psychological Bull. 82 (4): 463–96. Ameriks, John, and Stephen Zeldes. 2000. “How Do Household Portfolio Shares Vary with Age?” Working paper. New York: Columbia Univ. Bernheim, B. Douglas. 1993. Is the Baby Boom Generation Preparing Adequately for Retirement? Plainsboro, N.J.: Merrill Lynch. Bernheim B. Douglas, Daniel M. Garrett, and Dean M. Maki. 1997. “Education and Saving: The Long-Term Effects of High School Financial Curriculum Mandates.” Working Paper no. 6085 (July). Cambridge, Mass.: NBER. Boskin, Michael J., and John B. Shoven. 1987. “Concepts and Measures of Earnings Replacement during Retirement.” In Issues in Pension Economics, edited by Zvi Bodie, John B. Shoven, and David A. Wise. Chicago: Univ. Chicago Press (for NBER). Choi, James J., David Laibson, Brigitte Madrian, and Andrew Metrick. In press. “For Better or for Worse: Default Effects and 401(k) Savings Behavior.” In Perspectives on the Economics of Aging, edited by David A. Wise. Chicago: Univ. Chicago Press (for NBER). Choi, James J., David Laibson, and Andrew Metrick. 2000. “Does the Internet Increase Trading? Evidence from Investor Behavior in 401(k) Plans.” Working Paper no. 7878 (September). Cambridge, Mass.: NBER. Duflo, Esther, and Emmanuel Saez. 2000. “Participation and Investment Decisions in a Retirement Plan: The Influence of Colleagues’ Choices.” Working paper. Cambridge: Massachusetts Inst. Tech. Farkus, Steve, and Jean Johnson. 1997. Miles to Go: A Status Report on Americans’ Plans for Retirement. New York: Public Agenda. Gustman, Alan L., and Thomas L. Steinmeier. 1998. “Effects of Pensions on Savings: Analysis with Data from the Health and Retirement Study.” Working Paper no. 6681 (August). Cambridge, Mass.: NBER. Kahneman, Daniel, Jack L. Knetsch, and Richard H. Thaler. 1986. “Fairness as a Constraint on Profit Seeking: Entitlements in the Market.” A.E.R. 76 (September): 728–41. behavioral economics S187 ———. 1990. “Experimental Tests of the Endowment Effect and the Coase Theorem.” J.P.E. 98 (December): 1325–48. Laibson, David I. 1997. “Golden Eggs and Hyperbolic Discounting.” Q.J.E. 112 (May): 443–77. ———. 1999. Discussion of “The Adequacy of Household Saving” by Eric Engen, William Gale, and Cori Uccello. Brookings Papers Econ. Activity, no. 2, pp. 174– 77. Loewenstein, George, and Jon Elster, eds. 1992. Choice over Time. New York: Sage. Madrian, Brigitte C., and Dennis Shea. 1999. “The Power of Suggestion: An Analysis of 401(k) Participation and Saving Behavior.” Working paper. Chicago: Univ. Chicago, Grad. School Bus. O’Donoghue, Ted, and Matthew Rabin. 1999. “Doing It Now or Later.” A.E.R. 89 (March): 103–24. ———. 2001. “Choice and Procrastination.” Q.J.E. 116 (February): 121–60. Raiffa, Howard. 1982. The Art and Science of Negotiation. Cambridge Mass.: Harvard Univ. Press. Samuelson, William, and Richard J. Zeckhauser. 1988. “Status Quo Bias in Decision Making.” J. Risk and Uncertainty 1 (March): 7–59. Shafir, Eldar, Peter Diamond, and Amos Tversky. 1997. “Money Illusion.” Q.J.E. 112 (May): 341–74. Shefrin, Hersh M., and Richard H. Thaler. 1988. “The Behavioral Life-Cycle Hypothesis.” Econ. Inquiry 26 (October): 609–43. Sunstein, Cass R., and Richard H. Thaler. 2003. “Libertarian Paternalism Is Not an Oxymoron.” Univ. Chicago Law Rev. 70 (Fall): 1159–99. Strotz, Robert H. 1955. “Myopia and Inconsistency in Dynamic Utility Maximization.” Rev. Econ. Studies 23 (3): 165–80. Thaler, Richard H. 1981. “Some Empirical Evidence on Dynamic Inconsistency.” Econ. Letters 8 (3): 201–7. Thaler, Richard H., and Hersh M. Shefrin. 1981. “An Economic Theory of SelfControl.” J.P.E. 89 (April): 392–406. Thaler, Richard H., and Cass R. Sunstein. 2003. “Libertarian Paternalism.” A.E.R. Papers and Proc. 93 (May): 175–79. Tversky, Amos, and Daniel Kahneman. 1992. “Advances in Prospect Theory: Cumulative Representation of Uncertainty.” J. Risk and Uncertainty 5 (October): 297–323.