BUTLER: Making savings the default option

By Stuart Butler | Thursday, September 4, 2008

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Americans don't save anymore. The U.S. savings rate actually went negative in 2005 -- the first time that's happened since the Great Depression.

Failure to save is particularly risky for those with modest or low incomes. They have no cushion for sudden needs -- like emergency medical or car-repair bills. They have greater difficulty keeping pace with sudden price increases. (It was Americans with little to no savings who got lured into no-down-payment mortgages.)

And they build no nest egg for retirement.

But how do you get people to save? It's typically not that they lack funds. Even households earning less than $13,000 "invest," on average, 9 percent of their income in lottery tickets. They just don't choose to save it.

Ads promoting saving don't seem to work. Employers find it hard to get people to sign up for 401(k)s. Tax incentives spur saving among the affluent, but have little impact on people who don't pay much in tax anyway.

A group of researchers -- drawn from disparate think tanks and universities like the Brookings Institution, the Heritage Foundation and Georgetown University -- are promoting a simple but creative idea to reverse the dismal savings trend: "auto-enrollment."

It's based on a blend of economics and psychology, known as "behavioral economics," which recognizes that people often make decisions based more on habit and human nature rather than on textbook economics.

Basically, the idea is to change the default for saving from opting-in to opting-out. So instead of having to decide consciously to save at your place of work, you would be automatically enrolled in a saving plan unless you consciously decide not to save and take steps to opt out.

This could substantially increase saving by relying on behavioral inertia. We tend to just go with the flow. That's why having default withholding of taxes at the workplace leads most people to put aside enough for their taxes each year -- often more than enough. People essentially can opt out of tax withholding and pay little before April 15th. But they usually don't do that.

It's also why car-rental agencies can get so many of us to buy supplemental car insurance we don't really need. You can avoid buying the insurance just by initialing a few spaces on a form, and your bill would be lower. But an amazingly high number of people just go along and pay more. That's human nature.

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