April 10, 2012
I’ll Save More – Just Not Today Please
We know that not enough Americans save for retirement. Behavioral finance professor Shlomo Benartzi devised a way to fix it – quite awhile ago, in fact.
To ease the pain of saving money, Benartzi and economist Richard Thaler designed a now-famous program in which employees can commit to increase their 401(k)s savings when they get a raise.
Saving is painful because it requires sacrifice, but committing to save money that one doesn’t yet have synchs with human psychology. In 1998, Benartzi and Thaler tested their theory on blue-collar workers in a Midwestern manufacturing plant, and it worked.
The key to saving, Benartzi said, is “embarrassingly simple but extremely powerful.”
The finding was nothing short of ginormous, though employer adoption has been modest. David Wray, president of the Plan Sponsor Council of America, estimated that about 10 percent of U.S. employees with 401(k) plans at work have automatic savings increases, typically at raise time. It’s much more common among mega-employers, he said.
If you’ve heard about behavioral economics but haven’t had time to learn what it’s really about, this 15-minute TED video in which Benartzi explains is an excellent start.