Save more tomorrow
Behavioural economics works to help us save
Thanks to modern technology, we’re living longer than our grandparents used to! While this is great for our quality of life - it does mean our savings (especially pensions) will have to last longer. And we need to plan for this, otherwise we could be in financial hot water in old age. Typically, economic models suggest that people will save sensibly over time, so they don’t end up struggling in poverty in their old age - because that makes sense!. Nice idea, but it doesn’t always work. “Behavioural economics” is a term that explains the psychology behind peoples’ economic choices, such as why people don’t save more, even when it’s obvious that they should. Here are some behavioural economics theories about why it’s hard to save:
Avoid Loss - we have to cut spending, which feels hard (we’re trying to avoid this sense of loss).
Self control - requires saving more and spending less - a change in our spending habits - that’s hard! And requires self control.
Procrastination with regards to unpleasant tasks - it takes self control to undertake something difficult, like saving for retirement. Even though we want to save, we put it off as it is hard, and so time passes and we do not change our ways.
Hate change - describes the tendency for us to stick to our existing state, even when we know what the better thing to do would be. In this case save.
Short term satisfaction (delayed saving) explains the fact that we tend to prefer short term payoffs to long term returns. This also affects us in putting off saving - as we tend to prefer to save in the future, rather than right now.
SMarT (Save More Tomorrow) - a programme to help people save for pensions* - was designed to help people stop procrastinating and start saving for retirement, based on an understanding of the above behaviours.
The program is entirely based on the understanding that we find saving difficult! It aims to make saving for retirement easier in a number of ways. One of the major ways is that increases in pension contributions only happen when the employees get their next pay rise. So they don’t feel like they are losing money, and don’t need lots of self control to change their spending habits.
Also although employees can opt out of the program at any time, they have to take action to do so. It is easier to stick with the program, as it feels easy.
The results of the SMarT study showed that the program really does help people to save.
It seems we are complicated beings, but with a little understanding, we can start to save with greater ease. It’s important, as we simply need to save for retirement.
* A 2004 study using behavioural economics to increase employee saving was conducted by Richard Thaler and Shlomo Bernatzi. They created a system called Save More Tomorrow (or SMarT) to help people to save for pensions.