Automatic for the people: New approaches to building savings

The Obama administration recently announced a series of measures aimed at making it easier for Americans to save.  As the New York Times article on the initiative noted, the measures are all rooted in research from the field of behavioral economics:

One key finding in that research is that people are more likely to contribute to a retirement savings account, like an employer-sponsored 401(k) plan, if they are enrolled automatically. Workers have usually had to sign up for the plan, something that large percentages of people either postponed or never did at all.

The Administration’s measures will:

• Provide guidance for small businesses on how to use automatic enrollment for “simple IRAs” and encourage employers to institute an automatic “step up,” which increases a person’s saving rate each year or with each raise;
• Allow people to check a box on their tax returns and receive their tax refunds in the form of United States savings bonds;
• Make it easier for employees to contribute the money for unused vacation time and overtime to their retirement accounts;
• Publish an easy-to-read guide to help people understand the rules governing retirement plans when people change jobs.

None of these changes would force anyone to participate in a retirement program or invest in a savings bond. However,  the research guiding these policies suggests that by lowering barriers to participation – by changing the default settings to “opt in” or making contribution increases automatic – a significantly greater number of people will end up contributing to savings.

These kinds of policy changes would be well worth considering at the state level.  Oklahoma’s main state-operated savings vehicle is the 529 College Savings plan, which allows people to make tax-preferred contributions for  higher education expenses. As a legislatively-created task force reported a few years back, expanding participation in 529 plans would have benefits both in terms of making college more affordable for potential students and of helping more families develop savings habits and accumulate financial assets. OK Policy will be working with policymakers and advocates to develop policy ideas that could simplify and facilitate participation in 529 plans, particularly for low- and middle-income families who have never opened an account.  We look forward to sharing more about these ideas over the coming months.