Arnold Kling  

Economic vs. Non-economic Savings Incentives

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Hal Varian compares the potency of two types of incentives to save. One incentive is a tax break for savings. The other is a non-economic incentive, in which it becomes easier for an employee to sign up (or harder not to sign up) for a savings plan. For the latter, he cites research from James Choi, David Laibson, Brigitte Madrian and Andrew Metrick.

On the economic incentives of tax-advantaged savings accounts, Varian writes,


Unfortunately, these plans are unlikely to create much new savings. Instead, those with money to save would simply shift it from existing taxable accounts to tax-sheltered ones. Those with low incomes would probably not find the tax incentives enough of an inducement to increase their savings rate.

On the non-economic incentives of changing the "default choice" in employer savings plans, he writes,


It appears that defaults exert a powerful pull on behavior, perhaps too powerful. Forcing employees to make a choice seems to have a positive, and welcome, effect on overall savings.

Saving is an area where it may be difficult for people to learn optimal behavior. There is a long time lag between when you make a decision and when you find out whether it was correct or a mistake. Thus, saving is an area where "behavioral economics" might hold promise.

Nonetheless, I am reluctant to jump to the conclusion that non-economic incentives are more effective than economic incentives. I am still inclined to think that in the long run and in general equilibrium, economic incentives matter more. For example, changing the default choice might "trick" more people to sign up for a 401(K) type of program. However, in the long run do those people simply end up taking on larger mortgages or more credit card debt, inflating their balance sheets but leaving their net saving where it was before?

For Discussion. Varian's point that low-income people gain little incentive to save from tax-advantaged savings accounts reflects the fact that they are in low marginal tax brackets. Does this imply that there is a need for a form of negative income tax that encourages saving?


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COMMENTS (2 to date)
Hal Varian writes:

Note that the "change in the default" proposed by the authors is in fact eliminating the default and forcing them to make a choice. My own take on this is that making a choice, particularly about something that is important, is difficult and people just choose the default as an easy way out. Forcing them to make the choice seems to result in a better choice being made.

David Thomson writes:

"Forcing them to make the choice seems to result in a better choice being made."

I totally agree with this pessimistic assessment of human nature. Sigh, I often wonder if we would be better off if John Calvin's statue stood in the center of each town throughout the United States. Our founding father's embraced the realistic understanding that we are all "sinners." We often need a good kick in the pants to get us to do what is required.

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