A macro image of US Savings Bonds.

Field Work

Nudge to Save Doesn’t Work

The popular strategy of automatically enrolling people in savings plans didn’t work so well among low-income people.

Researchers found that when a tax preparation service slated 10 percent of filers’ tax refunds to purchase a savings bond, many balked and opted out of the program. The likely reason: they already had plans for how they were going to spend the windfall, including a pressing need to pay bills.

Automatic enrollment in 401(k)s, a strategy pioneered by behavioral economists, is gaining popularity in U.S. workplaces, largely because it works so well: a record 51 percent of U.S. employers used auto enrollment in 2010, according to Callan Associates, a benefits consultant.

Workers can still opt out, but employers have found that most of them remained in the 401(k) plan. This is due to inertia and also because employees know that saving for retirement is the right thing to do – they just needed a push.

But an experiment by economists at Swarthmore College and the University of Virginia, published recently by the National Bureau of Economic Research, “raises questions about the power of defaults.”

They targeted low-income people who received tax preparation services at eight sites outside of Philadelphia. Participants’ adjusted gross income was about $18,000, on average.

The economists tested how they would react if 10 percent of their refund checks – about $1,900 each – were automatically put into a savings bond in their name. A separate control group was not enrolled, but had the option of voluntarily buying savings bonds with their refunds.

The researchers concluded that auto enrollment “had no detectible effect on the decision to allocate some of the tax refunds to U.S. Savings Bonds.”

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