March 6, 2012
Extra in Refund Checks Spurs Savings
A breakthrough experiment determined that some low-income tax filers are willing to save part of their IRS refund after all.
What separates savers from non-savers is each individual’s own “mental accounting.” What specifically influences them is whether their refunds exceeded their anticipation.
The research found that 7 percent of all low-income filers saved part of their refunds. But 12 percent of people who got more than they’d anticipated agreed to save – they did so by opening a savings account or buying a US savings bond or certificate of deposit. Only 4.5 percent of those who got the same as, or less than, anticipated, saved part of it.
“At tax sites, most people don’t save,” said Michael Collins, director of the Center for Financial Security at the University of Wisconsin, Madison. “But if you target the right people you might find some savers.” His research controlled for income, demographics and the refund amount.
This apparent unwillingness to save the refund has bedeviled community advocates and academics who view refunds as golden eggs that can help low-income workers escape the cycle of financial despair. Untold numbers of experiments and social programs have searched for years to find that holy grail, with advocates trying clever strategies to persuade workers to save.
Low-income people typically rush to file by early February if they’re eligible for IRS refunds under the federal Earned Income Tax Credit – long before the media madness around the April 15 deadline ensues. But who can afford to save for a future emergency when unpaid bills are bearing down now or a trip home to see family is a priority? EITC refunds, which can range from about $1,500 to $7,000 for filers with children, were designed as an incentive to work.
In April 2010, Collins and his research team collected personal information from 3,079 filers entering tax-preparation sites in Philadelphia and Rochester, New York. When filers walked in the door, they filled out a form asking the amount they thought their refund checks would be. After their tax forms were filled out and refunds calculated, they disclosed how much they would receive from the IRS and whether they agreed to save some of it. Refunds averaged $1,555 – this was $127 more, on average, than the group expected.
“Targeting that teachable moment” – when tax refunds are unexpectedly large – appears to be the holy grail for refund-savings programs for low-income workers, Collins said.