Retirement Savings Schemes: Savings Rates Pt.2

In the previous article, we looked at some of the biases and heuristics that impacted the amount saved, and were introduced to the Save More Tomorrow programme (SMarT). Here, we will have a look at a few other issues and delve deeper into the SMarT programme, why it is effective and any drawbacks as well.

Finally, the Save More Tomorrow (or SMarT) programme tackles the cognitive bias of computational weakness by calculating and increasing the savings rates automatically. This reduces the burden on the employee, who now simply must check a box on a form to allow this system to take effect instead of calculating the required savings rate and adjusting it according to how much they want to save. They also no longer need to work out how much they need to have in savings by the end when they have retired, as the rate of saving continues to increase with pay rises to steep levels such as 14%. The result of this is that often much more is saved than necessary, which is obviously not a problem at all for the worker and removes the risk of too little being saved – simply put, it chooses to overestimate rather than risk underestimation.

This system has been revolutionary, allowing over 15 million Americans to set aside substantial amounts of money for retirement.[1] By applying a simple nudge where employees can increase the rate at which they save each time they get a pay rise, the retirement portfolios of millions have been able to grow substantially. The first instalment of the SMarT programme saw spectacular results – the average savings rates of the participants in the scheme more than tripled, jumping from 3.5% to 11.6% over a period of only 28 months.[2] If people can save more by themselves, then they can rely on their larger retirement savings in their senior years. This reduces the pressure on welfare and benefit schemes used to support senior citizens, and so this money can instead be reinvested into other aspects of the economy, allowing the nation to prosper and grow. In addition, these additional savings may end up going unused if the individual is unable to spend it all before their death, and so it is passed on to the next generations. This money can allow them to spend and consume more themselves, increasing their standard of living and allowing the benefits of the program to be reaped across multiple generations, boosting the economy even further.

Despite this, issues can arise when implementing the ‘Save More Tomorrow’ scheme, the main problem being due to inflation. Although the system increases the savings rate alongside pay rises to prevent spending from falling and loss aversion from taking effect, it does not take into account the inflation rate and how it varies across the time period in which the savings are made. A higher rate of inflation means goods are more expensive, as inflation involves the general price level of goods rising, and so someone on the same salary with rising inflation would be able to buy fewer goods, reducing their standard of living. This is why real income can be used, which is income adjusted for inflation. When the employee receives a pay raise, if this percentage does not at least match or exceed the inflation rate, then their real income falls, and they end up earning less in real terms. Therefore, if the savings rate increased under the ‘Save More Tomorrow’ scheme, they would, in fact, have to spend less. As they did not gain anything from the pay rise, the increased rate of saving would be taken out of their remaining income and reduce their consumption even further, thus further reducing their standard of living. The connotations of this are also severe – if many of the nation’s employees are enrolled in the ‘Save More Tomorrow’ programme or something similar, then when inflation is high, they will all be forced to cut spending and reduce consumption, which leads to a fall in output and additional damage to the economy.

[1] Benartzi, S. (2022) Save More Tomorrow. Available at: [Accessed 17 Mar. 2022].

[2]The University of Chicago Booth School of Business. (2004). Save More Tomorrow. Available at: [Accessed 18 Mar. 2022].

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