October 30, 2015


Why Is It So Hard To Save? U.K. Shows It Doesn't Have To Be (Chris Arnold, 10/23/15, Morning Edition)

Here's how it works: Employees start putting just 2 percent of their salary into a retirement account. Employers match a portion of that. And the total with the employer match increases over time to at least 8 percent.

So if millions of people can save money and invest for the future, why are we otherwise so bad at saving? It turns out that saving "is at the nexus of just about every behavioral bias we have," says Kate Glazebrook with the U.K.-based Behavioural Insights Team, a nonprofit that's consulting with the government on the program.

In the U.S., many behavioral economists agree. Brigitte Madrian, a professor at the Harvard Kennedy School, says that often, saving feels like losing if we have to take the money out of our own pocket or checking account and put it into a retirement account. Even though we're just squirreling it away for ourselves, it feels like a loss.

"There's a term in the economics and psychology literature called loss aversion," Madrian says. "The idea is that people experience a loss twice as severely as they experience a gain on the upside."

In other words, our aversion to loss overpowers our desire to gain money by investing, especially since the gain is years down the road.

Automatically enrolling workers into a savings plan and then deducting their pre-tax contribution from their paycheck means workers don't see or feel the loss. It sort of tricks their brains into doing the right thing.

"It takes a task that they want to do but that's hard and makes it easy," Madrian says. "The U.S. government figured this out in the 1950s when it came to income tax collection, that the way to get people to pay their taxes was to do it through payroll deduction."

...automatically put the money into a mutual fund which adjusts risk over time as if they were going to retire at age 70.

Posted by at October 30, 2015 12:07 PM

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