It’s a truism that people don’t save as much for the future as they should. For example, in the U.S., one of the wealthiest countries in the world, nearly half of people over 55 have no retirement savings at all, other than what they’ve paid into Social Security.
The problem is that as human beings, we prioritize our desires in the present moment ahead of our long-range goals—a phenomenon known as present bias.
“Saving for retirement is cognitively hard—figuring out how much to save—and requires self-control,” explains behavioral economist Richard Thaler. “The assumption that everybody will figure out how much they have to save and then will just implement that plan is obviously preposterous”.
Even the small hassle of filling out retirement plan paperwork is enough to deter employees from taking action, especially on tasks that don’t require urgent action, studies have found. Since it doesn’t matter whether you fill out your retirement savings form today or next week, it’s easy to just put it off indefinitely and never get around to it at all.
Another problem is that saving for retirement, in a way, is like taking your own money and donating it to your future self. But the “you” that will need that money decades from now can seem remote and abstract, almost like a stranger.
In one study, computer animators used age-progression software to create three-dimensional avatars of research participants, forecasting how their faces might look after years of aging, at age 65. Participants then interacted with these older versions of themselves in an immersive virtual reality environment, sitting in front of a mirror that reflected their future selves. Participants could look at themselves in the mirror and watch how their aged faces and bodies reflected their own movements. Participants then completed a retirement savings form.
The study found that participants who’d interacted with their future selves put away more than twice as much money as a control group that hadn’t—suggesting that the abstractness and remoteness of the future self’s needs may be part of why people don’t invest in their retirement.
Of course, asking every employee to interact with a virtual reality future self may not be practical. As it turns out, there’s a simple way that companies can help employees overcome the procrastination that keeps them from signing up for retirement savings plans: Employers can change the signup process such that automatically contributing to a retirement savings plan is the default option for all employees, rather than waiting to initiate contributions until an employee actively signs up for it.
When investing in a retirement savings plan is the default option for employees, around 90 percent of employees choose to participate. In one study, defaulting employees to a savings plan caused average employee savings rates to quadruple from 3.5 percent to 13.6 percent.
To further increase retirement savings rates, companies can default employees to “auto-escalation” or “save more tomorrow” plans, meaning that savings rates go up gradually over time. When auto-escalation plans are the default option, more employees participate in them, and total savings goes up.
These findings are a powerful reminder that small adjustments to choice architecture can help save people from their own short-sighted behavior. Indeed, the effect of default options on retirement savings rates is so dramatic that Thaler calls it “behavioral economics’ greatest success story.”
“The lesson from behavioral economics is that people only save if it’s automatic,” says Thaler. “My mantra is if you want to help people accomplish some goal, make it easy”.
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