On a recent evening walk, a friend confessed that she and another friend had purchased Powerball tickets the day before. Unsurprisingly, they lost, like millions of others across the country. (A healthcare worker in Massachusetts won the $758.7 million jackpot.)
It got me thinking: Why would sensible people buy lottery tickets, where their chances of coming away with big bucks are vanishingly small (1 in 292.2 million to hit the big winner) but be so reluctant to contribute to retirement savings—even with an employer match—where they are guaranteed a sweet return? Are there lessons we can learn from people’s preferences for lotteries over savings?
We need to figure it out, because when it comes to saving, as a nation, we are doing something very wrong. According to the latest data, the US savings rate is 5.7 percent. In other words, for every $100 of after-tax income, the average American puts away only $5.70 for things like retirement, emergency expenses, and rainy-day savings. Most experts say that rate should be closer to 15 percent.
Do we need to make it easier to save, or do a better job marketing the benefits of savings? Or do people need a different kind of motivation, or maybe some simple validation?
The recent demise of myRA is a case study in how hard this is. The Obama Administration designed the program for low- and moderate-income workers who don’t have access to employer-sponsored retirement plans. Those workers could contribute to myRA, a safe tax-advantaged retirement account akin to an Individual Retirement Account (IRA), and see a modest positive return.
But only 30,000 workers enrolled, and the Trump Administration shuttered the program last month, saying it cost too much to run. There are a number of possible explanations for that small number. The Urban Institute’s Richard Johnson notes that the program lacked automatic enrollment, though extensive research shows this strategy increases retirement savings, especially for young and low-income workers. A recent analysis by the Employment Benefit Research Institute tells the story.
David Mitchell of the Aspen Institute blames the demise of myRA on poor marketing caused by a lack of funding. David John, of the AARP Public Policy Institute and the Brookings Institution’s Retirement Security Project, says that Treasury never did much to publicize the program, “relying instead on other organizations to do so. This approach clearly failed.”
Then there’s the question of motivation. After talking with my lottery-buying friend, myRA’s demise doesn’t feel all that surprising. She explained that a few of her work colleagues declined their company’s matching 401(k) plan because they didn’t understand that they were turning down free money from their employer or that their accounts, held in a mutual fund, could grow significantly. In the case of a dollar-for-dollar employer match, the contribution doubles in value immediately. And if the account earns 7 percent per year, the value will double in about 10 years.
Yet she has a coworker who bet (or “invested”) at least $1000 on the lottery in the past year and has so far won about $500.
That makes little sense to me, but it clearly makes sense to this coworker. As TPC’s Bill Gale and Ruth Levine of the William and Flora Hewlett Foundation explained in their assessment of Americans’ financial literacy, the Consumer Federation of America (CFA) and the Financial Planning Association found that “21 percent of individuals surveyed—including 38 percent of those with income below $25,000—reported that winning the lottery was ‘the most practical strategy for accumulating several hundred thousand dollars’ of wealth for their own retirement.”
Instead of fighting this attitude, some businesses and policymakers are trying to increase savings by making it look more like a lottery.
Rob Walker, writing for The Atlantic, wonders if we can “trick” people into saving more with programs like the Save to Win program or Walmart’s MoneyCard Vault.
The Save to Win program, developed by Commonwealth, the Filene Research Institute, and the Michigan Credit Union League, gives credit union members a chance to win monthly and quarterly cash prizes, up to $5,000 for every $25 they deposit.
Walmart’s MoneyCard Vault program is a prepaid debit card with a twist. For every dollar saved through the card, participants get a chance to win a cash prize of up to $1,000.
Do these programs increase total household savings? The jury is still out.
What about validation? Would more of us save more for retirement if we received a regular, encouraging pat on the back? Maybe. In a 2012 National Bureau of Economic Research paper, Felipe Kast, Stephan Meier, and Dina Pomeranz found that self-help peer groups increased the number of deposits by 350 percent, and almost doubled the average savings balance after a year.
Members of the group felt accountable to one another for reaching their established savings goals. The researchers suggested that modern technology such as text messaging could make self-help groups scalable and attractive to bigger and different populations.
Which brings me back to my lottery-buying friend. She and I “follow” each other on an activity app. We know when either of us has completed a workout, and how many steps each of us has taken every day. That’s what prompted our evening walk together in the first place (we were behind in our steps). The same app recently told me to congratulate her for completing a ten-mile run. I was thrilled for her, but I have to admit, I also felt a pang of guilt, as in, “I should be training for at least a 10K…”
Could the future include an app that reimagines tax-advantaged savings—one that allows you to set goals with a friend? Could you see this smart phone notification: “Congratulate Jane—Your friend just contributed 5 percent to her IRA! Swipe right to boost your contribution!” Retirement savings amounts could climb rather nicely, don't you think?
Well, it’s at least more likely than a Powerball win.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment.
