David R. Henderson  

Nudged and Stuck

PRINT
Posner's Great Mystery... Consumer Surplus from the Inte...
Automatic enrollment appears to be a win-lose approach to changing 401(k) savings behavior. The win aspect is that automatic enrollment dramatically increases 401(k) participation, with particularly large effects among the groups who would otherwise tend to have the lowest participation rates (blacks and Hispanics, the young, and those with lower compensation). Automatic enrollment also serves to partially equalize participation differences with respect to gender, race/ ethnicity, age, and compensation. The lose aspect of automatic enrollment is that it generates a tremendous amount of participant inertia. The vast majority of plan participants stick with the default contribution rate and investment allocation, even though only a tiny fraction of participants not subject to automatic enrollment voluntarily choose that particular allocation within this company. Simulation results reported in a previous version of this paper [Madrian and Shea 2000] show that default savings behavior under automatic enrollment may actually lead to lower total 401(k) savings after only a few years relative to more traditional 401(k) plans that require an active savings decision on the part of participants. (emphasis added)
This is from Brigitte C. Madrian and Dennis F. Shea, "The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior," Quarterly Journal of Economics, November 2011, Vol. 116, No. 4.

According to a news story in today's Wall Street Journal, "401(k) Law Suppresses Saving for Retirement," July 7, many people have got stuck at the suggested 3% level. Here's the Journal:

Yet 401(k) participants' average savings rates have fallen in recent years. Among plans Aon Hewitt administers, the average contribution rate declined to 7.3% in 2010, from 7.9% in 2006. The Vanguard Group Inc. says average contribution rates at its plans fell to 6.8% in 2010, from 7.3% in 2006. Over the same period, the average for Fidelity Investments' defined contribution plans decreased to 8.2%, from 8.9%.

Vanguard estimates about half the decline "was attributable to increased adoption of auto-enrollment."


Of course averages are almost always misleading. When you bring in a lot of people who wouldn't have saved anything but who now save 3%, that will bring down the average of participants' savings rates while it still could increase overall saving. Indeed, according to the Journal story:
The total annual amount being put into 401(k) plans has increased by 13% since 2006, to an estimated $284.5 billion this year, according to consulting firm Cerulli Associates. That is largely because the rule has successfully prodded millions of people who wouldn't have saved a penny for retirement to start saving something.


Comments and Sharing





COMMENTS (16 to date)
Noah Yetter writes:

If these averages don't include people who are contributing 0% then they're not really the figures we want, are they?

hamilton writes:

When the authors say it leads to lower total savings relative to active 401(K) participation, does this mean *conditional on participation*? Isn't the whole point of auto-enrollment that it takes people who weren't taking advantage of tax-preferred accounts and putting them into those accounts? And, thus, is not a win-lose, but just a win?

I will have to read the paper. It strikes me as a failure to capture additional gains, but not a loss relative to the "un-nudged" state.

Bill writes:

My problem with automatic enrollment is this:

By forcing people (even those of limited means) to put money in to a certain class of investments - and lets be real here, these forced people will be putting that money into mutual and index funds - you are artificially and temporarily inflating the price of those investments.

This money does not necessarily become productive capital. As the prices of the underlying equities and bond gets bid up beyond their natural value by the influx of cash, savvy investors will take profits at the expense of the rubes. Those profit takers will then be the ones making productive capital investments.

So, while we are giving the appearance of increasing savings, it is more of an income transfer from the poor and middle class to the wealthy, in exchanged for some tax benefit.

Am I wrong?

steve writes:

I find this curious. Are the people reducing their savings interpreting "suggested" as "suggested to be adequate"? This is the only thing I can think of.

rpl writes:
By forcing people (even those of limited means) to put money in to a certain class of investments...
Nobody is being forced to do anything. You can still opt out if you want to. All that has changed is that the default is to opt in.
... and lets be real here, these forced people will be putting that money into mutual and index funds
I'd think that target-date funds would be a likely choice, and those hold several different asset classes. However, irrespective of what the default choice is, the argument you made (i.e., that putting 401-k dollars there will bid up asset prices) applies equally to any investment choice. Just what sort of vehicle do you propose "people (even those of limited means)" use to save?
So, while we are giving the appearance of increasing savings, it is more of an income transfer from the poor and middle class to the wealthy, in exchanged for some tax benefit.
It's not clear that there is an actual income transfer (you assume it without supporting evidence), and it's certainly not clear that the transfer, if it exists at all, exceeds the value of the employer match, which the employee forfeits if he does not participate in the program. Thus, there are a lot of assumptions masquerading as facts in your argument. I'd have to see some convincing support for them before I'd buy it.

Note that if your assumptions are correct, then even those of us who have made an affirmative choice to save are being taken advantage of just as much as the default enrollees are. Therefore, we should, by your logic, all stop saving immediately. That's an extraordinary claim, which, as they say, requires some extraordinary evidence.

Bob Murphy writes:

I think putting one's lifetime savings into the US stock market right now is a very risky thing, for what that's worth. People who were planning on retiring in 2008 or thereabouts got absolutely crushed.

Matthew C. writes:

The 401K is a roach motel -- you can put your money in but can't get it out (without quitting your job!)

This is a big problem for me as I believe the dollar is set for huge inflation if not outright currency collapse. I want gold and silver, not money markets or equities (my only options in the 401K). Anyone actually believe the current fiscal track the US is on is actually sustainable?!

rpl writes:
This is a big problem for me as I believe the dollar is set for huge inflation if not outright currency collapse. I want gold and silver, not money markets or equities
If the US dollar has an "outright currency collapse," we're going to have the mother of all economic disasters. What makes you think that under such circumstances people are going to trade actual, useful goods for lumps of shiny metal? I certainly wouldn't. If you really think collapse is imminent, I'd recommend investing in canned beans. As an added bonus, the byproduct of consuming them may wind up being a useful fuel when the US turns into Mad-Max-land.
Anyone actually believe the current fiscal track the US is on is actually sustainable?!
Always keep in mind Stein's Law. The big question, as always, is whose ox is going to get gored when we finally get around to balancing the budget. Crisis hasn't become sufficiently imminent to force politicians to make those unpopular choices, but when the day of reckoning arrives, they will make them because they will have no choice. Personally, I doubt they'll choose the Thunderdome option, but you never know. Maybe I'll add categories for beans and ammunition to my asset allocation, just in case.
liberty writes:

Given the last point (and the first comment is exactly right - the average should include those at 0% to resolve this issue) it sounds like the nudge is working pretty well. Of course, if some people are "getting stuck" and the wise parental state wants to fix this the rule could be changed to automatically increase your contribution over time unless you change it. It could go from 3% to 3.1% then 3.2% etc, a tenth of a percent each year or something, unless and until you unchecked the box for that and chose your own rate.

Matthew C. writes:
If the US dollar has an "outright currency collapse," we're going to have the mother of all economic disasters. What makes you think that under such circumstances people are going to trade actual, useful goods for lumps of shiny metal?

I'll take shiny lumps of metal over wheelbarrows full of ink-stained paper. History shows I'm right about that one, too.

The history of currency collapse is that you do not get "mad max" but replacement of the bad currency with good money (or better money). Gold (and silver) are the definition of good money for 5000 years, and I suspect they will remain so long after the US$ is history. You might want to ask yourself the question why central banks hold thousands of tons of the stuff. . .

Of course there will be a lot of deprivation and suffering associated with currency collapse. The question is -- are we heading for one? Public choice analysis suggests that individuals benefit from ongoing money printing paying for their particular gravy train. The value of the currency as a whole is the "commons", owned by no one. I suspect this experiment with fiat will end as all previous experiments have -- overissuance, loss of faith in the currency, forced money printing by powerful constituencies to get "their dollars", and collapse.

Ask yourself -- is our financial / economic system doing well, or heading for collapse and replacement? Look at metrics like workforce participation, debt levels, % of people on food stamps, dollar issuance, and how those metrics have changed since 2008. I know which way I am betting.

Matthew C. writes:
Always keep in mind Stein's Law. The big question, as always, is whose ox is going to get gored when we finally get around to balancing the budget. Crisis hasn't become sufficiently imminent to force politicians to make those unpopular choices, but when the day of reckoning arrives, they will make them because they will have no choice.

I should have gone into a bit more detail in my reply here.

1) Whose ox was gored in 2008? The answer is: nobody's, at least at the Federal level. The banks got an end to mark-to-market accounting, ZIRP, huge bailouts, and other kick-the-can nonsense. The big corporations got a huge increase in Federal spending paid for by borrowing and money printing, to make up for the lack of private sector borrowing and consumption.

2) A fiat - debt driven economy is based on a ratchet. It only goes one direction -- more money supply, more debt (and I should add, more regulations, more government). Ever wonder why the Fed is so terrified of "deflation"? Deflation means a cascading failure of the existing debts. And to avoid that, the Fed created base money to pay for a trillion dollars of toxic subprime mortgage debt. Of course, creating base money is ultimately inflationary. See why "shiny lumps of metal" have an appeal -- Ben Bernanke cannot create more of it at the click of a mouse button.

3) The government can ALWAYS print / QE more dollars into existence to pay for its obligations. As it has, in fact, been doing since 2008. If the choice is between printing money to pay for 50 million social security recipients, and not paying them, do you honestly expect government to fail to send out those envelopes? The history since 2008 tells us -- trust government to kick the can a bit longer, rather than face an immediate collapse.

4) As deficits continue, commodities go up, gold and silver set new highs, gas prices go from $4 to $5 to $6 a gallon -- the world will increasingly lose faith in the purchasing power of their dollars. As some point (say, when the DXY hits new all-time lows) there will be a sudden shift in psychology and loss of confidence in the dollar. It could begin overseas when some of the trillions of dollars there get dumped in exchange for tangible assets. Overnight you could see a loss of 20-30% or more of the dollar's purchasing power against other currencies and commodities. This will be the beginning of hyperinflation and currency collapse, as the government will have to put the printing into overdrive to pay for its bills.

rpl writes:
I'll take shiny lumps of metal over wheelbarrows full of ink-stained paper. History shows I'm right about that one, too.
Surely productive assets would be better still. Gold is the ultimate nonproductive asset. It just sits in a warehouse collecting dust. Ultimately its perceived value is no more or less a delusion than any other sort of money.
the world will increasingly lose faith in the purchasing power of their dollars. As some point (say, when the DXY hits new all-time lows) there will be a sudden shift in psychology and loss of confidence in the dollar. It could begin overseas when some of the trillions of dollars there get dumped in exchange for tangible assets. Overnight you could see a loss of 20-30% or more of the dollar's purchasing power against other currencies and commodities.
Well, that's only if we don't get wiped out by global warming first. Or a killer asteroid, or antibiotic-resistant superbugs, or the Second Coming, or whatever. We Americans do love us some doomsaying, don't we?
This will be the beginning of hyperinflation and currency collapse, as the government will have to put the printing into overdrive to pay for its bills.
I doubt it. There is ample fat that could be cut from the US Federal budget, and for that matter some scope for raising taxes. The pain just hasn't gotten bad enough for the pols to be willing to take the heat for doing it yet. We don't need as much military as we're buying. We could raise the retirement age and means-test social security, and if we can't pay for gold-plated Medicare benefits, we won't (Stein's Law!). We could have a consumption tax too, or we could sell off some of the assets the government uselessly holds on its books.

I'd worry about state and local solvency before I worried about the Feds; some of those guys are in really rough shape. But don't hold your breath waiting for that hyperinflation. There is, I'm told, a lot of ruin in a nation.

Matthew C. writes:

rpl,

Your analysis ignores history where every fiat experiment has ended in hyperinflation and currency collapse. And it ignores history since 2008. Look at what they are doing, not what you think they "ought" to do.

Just for example, look at the unaffordable payroll tax that kicked off 2011. Why are they doing that? Because the economy sucks and needs constant life support. And even now is falling into a black hole again, due to unsupportable amounts of debt, government spending, demographic failure (retirement of the baby boomers), and regulatory dead weight and rent seeking.

I would like to hear you sunshine and roses folks please explain your path to a sustainable financial system. I've explained mine -- the dollar is going to collapse, washing away all of the unaffordable debt with it and we'll start over with real money and the limited government we can actually afford to pay for. And, of course, without the TBTF and Wall Street siphoning off 25% of the national income.

rpl writes:
Your analysis ignores history where every fiat experiment has ended in hyperinflation and currency collapse.
You ignore all the fiat currencies that have had neither hyperinflation nor collapse. No doubt you'll say that the experiment isn't over yet, and the collapse will come, but then that renders your historical examples pretty worthless because there is no other way for a fiat currency experiment to end other than collapse. Currencies that don't collapse just keep going. At some point they've been going long enough that they're no longer "experiments," but facts of life.

While you're on the subject of history, you might want to look at the differences between the US and the places where hyperinflation has occurred. The Wiemar Republic had crushing reparations that it couldn't get out from under. Zimbabwe had a madman systematically dismantling the country's economy through disastrous land reform, and so on. We don't have anything like that today. Quite the contrary, there is plenty of stuff that could be cut from the federal budget. We could start by cutting our military spending to merely equal that of China, France, the UK, and Russia combined. By my calculations that would save us about $400 billion per year.

I don't know that my view constitutes "sunshine and roses," since it relies on the assumption that the economic pain will increase until policy makers will be forced to take responsible action. A lot of people are going to get kicked in the teeth when that happens, but we'll get through it.

I'm curious, is it your contention that the economy is currently in worse shape than it was in 1933 (which the US and its currency managed to survive)? You talk as if you think so, but I'm just not seeing it in the real world.

But, hey, if you really want to invest in a non-productive asset that is currently trading at historic highs, knock yourself out. We'll reconvene in five years and compare notes on how it turned out.

Matthew C. writes:

rpl,

You're mistaken about the 1930s as we were not on a fiat currency standard then, but a gold standard. So of course the currency didn't collapse in the great depression as it was backed by real money.

The current great fiat experiment began in 1971, when Nixon closed the gold window. Before then we (and pretty much the rest of the world) were on a version of the gold standard. The reason for the closing of the gold window is that the French decided to redeem a bunch of their dollars for gold and we didn't have enough gold to back all the currency we were printing up to pay for Vietnam and the great society (guns and butter!) And after that point, everyone moved over to fiat until the last holdouts (the Swiss) switched over in 2000.

Pure fiat didn't fare very well at all out of the gate. We began to see raging inflation in the 70s and the experiment almost ended in the early 1980s as gold and silver prices went on a moonshoot. Fortunately (or not), Paul Volcker singlehandedly saved the dollar by raising interest rates through the roof (and creating positive real interest rates), making buying debt in US dollars attractive, and stopping the out of control money printing for a bit. But it was a close call, then. We were a net creditor nation with an insignificant level of indebtedness, so it was possible to raise interest rates into the double digits. Today, raising rates to 1/2 of the level Volcker did would instantly detonate all the banks and make it impossible to pay the interest on the national debt. So there will be no repeat.

I'd certainly suggest the jury is currently "out" on how much longer the current fiat dollar financial system is going to last. My bet: not a lot longer, given the trends we see in deficit spending and money printing around the world, and the fact that all the large banks are only open because they are all openly lying about their asset values (see suspension of mark to market accounting). Or just look at the mortgage market -- basically the US government IS the mortgage market right now. We basically have an ad-hoc centrally planned financial system at this point where the TBTF lie about their asset values, pay themselves billions in bonuses, and rely on the Fed and taxpayer to eat the losses on their bogus loans.

This will not end well, and it won't stand up much longer. I'd give it till 2015 at the longest.

Matthew C. writes:
But, hey, if you really want to invest in a non-productive asset that is currently trading at historic highs, knock yourself out. We'll reconvene in five years and compare notes on how it turned out.

Gold is money, it has been money for 5,000 years with a small hiccough the last 40 when it was partially demonetized. Central bankers agree with me and disagree with you -- they are buying gold and not buying any more dollars. Maybe it's because the supply of dollars is going up at 30% or more a year and they can see the handwriting on the wall? Of course the price of gold, oil, and wheat is going up -- as the number of dollars chasing it is going up at an exponential rate.

Gold is facing a continuing remonetization which is likely (when complete) to result in a gold price that will astonish you. Or maybe Bernanke et. al. can stop the remonetization of gold and replace it with something else -- but I doubt it. Look at the idiocy of how they are dealing with Greece and the other PIIGS -- and think about how California etc. are going to be bailed out with freshly printed Fed cash.

Gold is a schelling point for money -- and a lot more trustworthy than the printing presses of the fiat currency issuers. Which is what holders of the Continental, Assignat, Reichsmark and every other fiat currency in history have found out to their financial ruin.

Comments for this entry have been closed
Return to top