Encouraging Pessimism for Greater Savings?

During the Social Security lecture to my class of 500 freshman, most expressed disbelief that the program would exist when they retire.  Like a young colleague of mine, they were sure they would never collect.  

Wrong!  I can’t see the program being abolished.  It is very popular, and its potential bankruptcy is one of the most easily dealt with policy problems we face:  just raise the age for regular benefits by one year in each of the next four quinquennia, raise the taxable base for FICA, and voilà — problem solved.

But perhaps my students’ pessimism is a good thing.  If they believe this, and act on their beliefs, they will set aside more for their private pensions — saving more. Given the low American saving rates over the last few decades, maybe I should encourage their pessimism!

With a Lottery Option, Saving Is Easier

Back in 2010, we put out a two-part podcast (Part 1; Part 2) about Prize-Linked Savings (PLS) plans, which combine the safety of a savings account with the thrill of a lottery payout. It is one of the most intriguing ideas we've run across in some time. Maybe not earth-shattering, but potentially an important way to help people save more money.

Now a group of scholars (including the University of Maryland economist Melissa Kearney, who was featured in the podcast) have put out a working paper (abstract; PDF) that set up experiments to determine whether a PLS plan would actually induce better savings behavior. Their answer is yes.

"Under-Savers Anonymous": Using Peer Pressure to Save More Money

A new working paper by Felipe Kast, Stephan Meier, Dina Pomeranz combines two of our favorite topics, both explored in recent podcasts: our inability to save money and the efficacy of commitment devices. The paper is called "Under-Savers Anonymous: Evidence on Self-Help Groups and Peer Pressure as a Savings Commitment Device" (abstract; PDF), and it reports a remarkable near-doubling of savings among those who submit to peer pressure:

We test the effectiveness of self-help peer groups as a commitment device for precautionary savings, through two randomized field experiments among 2,687 microentrepreneurs in Chile.  The first experiment finds that self-help peer groups are a powerful tool to increase savings (the number of deposits grows 3.5-fold and the average savings balance almost doubles).  Conversely, a substantially higher interest rate has no effect on most participants.

Training to Save in Ghana

Freakonomics fans will already know that financial literacy is a hot issue for researchers – it’s in everybody’s best interest to get people making better financial decisions, but frankly, we’re not terribly good at it.  The natural response is that if you just explain to people how to make better decisions, they’ll do it, but as we’ve heard in the podcast, it ain’t necessarily so. Just taking rational, clear-thinking adults and explaining how to make better financial decisions makes them feel good, but doesn't necessarily help them make better decisions.

So we wondered if we could fix the problem by backing up the process and starting early, when kids were still in school.  And we decided to do it in a place where people can use all the financial help they can get – Ghana, which has one of the lowest savings rates in Africa.

Cues to Save Money

Americans have a notoriously low savings rate, a problem we explored in a podcast about prize-linked savings plans. In another podcast, "A Mouse in the Salad," Richard Thaler (author of Nudge) discussed "anchoring," a cognitive shortcut whereby we make decisions based on an anchoring number even if it is randomly generated.

A new NBER paper (ungated version here) by Yale's James J. Choi and Cade Massey, along with Emily Haisley of Barclays Bank and Jennifer Kurkoski of Google, shows that anchoring very much affects how people save (or don't save) their money.

Lottery Loopholes and Deadly Doctors

Season 2, Episode 5

Americans have a famously low savings rate: a Harvard survey found that half of us, if faced with an emergency, couldn’t come up with $2,000 in 30 days. Most people would rather spend than save -- and one of our favorite expenditures is playing the lottery. Last year, we spent more than $58 billion on lottery tickets, or roughly $200 per person. As entertainment goes, the lottery is pretty cheap – a dollar and a dream, and all that. But as an investment, it offers a dreadful return, which is why the lottery is sometimes called “a tax on stupid people.”

This episode looks at a little-known financial initiative that might help people save money while giving them the thrill of the lottery.

Your End of Days: Would Life-Length Testing Save the Government Money?

A Spanish company announced this summer that it can help determine when people will die by using a blood sample, a $700 test, and research that earned three American geneticists the Nobel Prize in medicine in 2009. Though the test has its critics, and though it won’t offer an exact date for one’s death, it does promise to reduce uncertainty about longevity by examining a tiny part of DNA that reveals biological age as opposed to chronological age. Successive generations of the test are likely to improve in predictive power.

Our ignorance about an individual’s longevity is the source of a number of problems. Many of them are personal, but some have implications for society writ large, and taxpayers in particular. So one wonders: if the government can make you confront the calorie content of your diet, can it also make you confront your mortality?

If the government were to mandate “life length” testing, it could help resolve the intractable lifetime savings problem. Pervasive under-saving among households is a result of our impatience, to be sure, but it is certainly also a consequence of the fact that no one knows how long his savings need to last. Save too much and you miss out on having fun when you're alive. Save too little and you end up broke and reliant on the social safety net that taxpayers fund.

Another No-Lose Lottery

Last week, Michigan's Save-to-Win program, the sort of "no-lose lottery" we discussed in a two-part podcast, announced its second winner. Charmain Hanners of Alpena Alcona Area Credit Union is this year's lucky winner of $100,000.

Giving Back the Tax Cuts: A Guest Post

My colleagues Jacob Hacker and Daniel Markovits have created a cool website called www.GiveItBackForJobs.org that not only includes a useful tool to let you calculate the size of your tax cut, but suggests that "Americans who have the means should collectively give back our Bush tax cuts, by making donations to organizations that promote fairness, economic growth, and a vibrant middle class." Here's a post from the creators themselves that gives more details.