The Save More Tomorrow, SMarT Plan, by Sholomo Benarzti and Richard Thaler, 2004, proposed a way to deal with the problems of retirement savings.
No matter what we do, we are all in organizations pursuing changes in people’s behavior. This is the decision process in order to save for retirement.
Analyzing the process we can identify factors that challenge people to carry out their intentions, there are bottlenecks::
- Retirement too distant and irrelevant.
- Insufficient money to save and indecise about savings.
- Too many possibilities for retirement instruments.
In these bottlenecks we can apply a “Nudge”, that is, change the behavior in a desired way without prohibiting and without altering its economic consequences.
Biases that we encounter and that make it difficult to make the optimal decision for us:
- Present: tendency to make a decision by focusing on current> information. A reference paper “Doing now …” by Donoghue, 1999.
- Loss aversión: it is preferable to avoid a loss tan to have a benefit of the same value. Seminal article “Prospect theory” by Kahneman and Tversky, 1979.
- Inertia: tendency to the status quo, not to move. Reference paper “Status quo …” by Samuelson and Zeckhauser, 1988.
- Excess of choices: difficulty deciding when there are many alternatives. “When choice is demotivating …” Iyengar and Lepper, 2000.
About the definition of Nudge: Nudge, Thaler and Sunstein, 2008. And from “A practitioner’s guide to nudging” by Dilip Soman 2013.
The Save More Tomorrow, SMarT Plan, by Sholomo Benarzti and Richard Thaler, 2004, proposed a way to deal with the problems of finalist saving for retirement.
There are experiences around the world and some in Spain that, with success, have significantly increased savings for retirement.
We know the decision process and the bottlenecks. We apply Nudges. A “nudge” is any element of the decision-making architecture that alters people’s behavior in a predictable way and without forbidding any option or significantly changing its economic consequences, or employing advertising. To count as a simple push, the intervention should be easy and, likewise, easy to avoid. Nudges are not mandates. Examples: put junk food in a place not easily visible, paint a girl picking up a ball, on the road, in the vicinity of a school, make a default investment proposal …
- Default enrollment, in an employment pension scheme, automatically adheres to the eligible person.
- Matching of contributions, the company makes a contribution if the employee makes their contributions.
- The investment policy is decided by the control commission and is applied by the pension managment firms, the venturer does not have excessive information, this does not provoke overconfidence, nor optimism …
- The previous decision to pay part of the salary increase of the next year by default is communicated. There is no sense of loss, they keep at least the income to which they were accustomed. They know it’s a good thing for them, their colleagues are doing it, they can always change it whenever they want. There is an automatic increase of this contribution each year.
- Most importantly, it is voluntary and transparent. It is voluntary because at any moment the participant can make his own decisions. It is transparent because the information is constant and is critical in order to make the best decisions.
The conclusion. So the savings are improved and it would not be a matter of companies contributing more money:
- A large percentage of the participants maintain their voluntary contribution through salary increase after years.
- Increases in the number of people with voluntary contributions multiply by several times. Even in lower wage and middle age employees.