How 'Save More Tomorrow' programmes work

Jonathan Stapleton
clock • 4 min read

Yesterday, Richard Thaler was awarded the Nobel Prize in Economics. Jonathan Stapleton takes a look at how his concept of 'Save More Tomorrow' can help firms increase employee pension savings and engagement

The concept of Save More Tomorrow (SMarT) is not new - but is one that has not caught on in many UK occupational schemes.

The scheme - designed by Richard Thaler, professor of behavioural science at the University of Chicago Booth School of Business, and Shlomo Benartzi, a professor at the UCLA Anderson School of Management - allows workers to allocate a portion of future salary increases towards their retirement savings.

An employee, therefore, might opt to allocate 50% of any future salary increases to their pension plan - meaning that, should they have a pay rise of 2% in any given year, half of this would go into their wage packet and half into their pension. Importantly, workers do not see any fall in their take home pay as a result of this programme.

In their paper - Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving - Thaler and Benartzi explain how this idea uses principles from psychology and behavioural economics to devise a program to help people save more. They also outline how this works in practice.

The first implementation of the Save More Tomorrow plan took place in 1998 at a mid-sized manufacturing firm in the US. Prior to the adoption of this scheme, the business suffered from both low participation and low savings rates.

The firm was concerned this low level of workplace saving would mean some of the workers would not have sufficient income in retirement. Less altruistically, senior managers were also concerned that, because of a US law which restricts the proportion of benefits that can be paid to higher earners in a firm, they may not be able to get the full amount of tax relief on their own pension arrangements.

The company began implementation by making a financial adviser available to all staff. All but 29 of the firm's 315 staff agreed to meet the consultant and get his advice.

During the individual meetings, the consultant calculated a savings rate for each employee and made a recommendation. Where this meant employees would have a contribution rate increase in excess of five percentage points - or where the workers said the recommended rate increase was too much - the adviser offered a version of the SMarT plan as an alternative, proposing that they increase their saving rates by three percentage points each year starting with their next pay rise.

Out of the 286 staff that saw an adviser, only 79 accepted the proposed savings rate; 162 enrolled into the SMarT plan; and 45 declined both the proposed rate and SMarT.

The plan proved incredibly popular. Only three participants dropped out of the plan prior to the second pay rise, 23 more dropped out between the second and third pay rises and six more quit the plan between the third and fourth pay rises.

Average savings rates of those employees in the SMarT plan rose from 3.5% before they received advice to 13.6% after the fourth pay rise. Of those workers who did not contact the consultant, savings rates fell from an initially higher 6.6% to 6.2% - and the contribution rate of those who had seen the adviser but did not go ahead with either the proposed rate or SMarT decreased from 6.1% to 5.9%.

The overall company savings rate rose from 4.4% to 10.6% over the four pay rise period.

Subsequent implementations of SMarT - at Ispat Inland, a large steel firm in 2001; and at two divisions of Philips Electronics in January 2002 - also saw increases in contribution rates. At Ispat Inland, average contribution rates of those employees who were already saving increased from 7.62% to 9.38% after the first pay rise. At Philips Electronics the rate of those already saving rose from 5.26% to 6.83% after the first salary increase

It is clear the initial experience with Save More Tomorrow has been a success. Many of those who were offered the plan decided to use it and a majority of those who joined the scheme have stuck with it. Contribution rates have increased significantly.

As the authors explain in the paper: "One reason why the SMarT plan works so well is that inertia is so powerful. Once people enrol in the plan, few opt out. The SMarT plan takes precisely the same behavioural tendency that induces people to postpone saving indefinitely (i.e., procrastination and inertia) and puts it to use."

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