#326 1998 · Richard Thaler & Shlomo Benartzi (Save More Tomorrow) · Retirement finance / behavioral economicsredesign-the-moment
Employees wouldn't save more of today's paycheck, so Thaler and Benartzi asked them to save more of a paycheck they didn't have yet.
the problem
people know they should change a financial behavior but the change itself feels like an immediate loss, so they keep delaying it
background
Retirement savings programs in the 1990s consistently struggled with low enrollment and low contribution rates even when employers offered matching funds, because asking an employee to increase their 401(k) contribution meant asking them to accept a smaller paycheck starting immediately — a visible, current loss that behavioral economics research showed people weighed far more heavily than the equivalent future gain from a bigger retirement balance. Standard financial education campaigns explaining the long-term math rarely overcame this immediate loss aversion.
Economists Richard Thaler and Shlomo Benartzi designed an alternative around a specific behavioral insight: loss aversion only bites when the loss is felt now. If a savings increase could be timed to future pay raises instead of current pay, an employee's take-home pay would never actually decrease — they'd simply keep a smaller slice of a raise they hadn't received yet, a choice people find far easier to commit to in advance.
the move
The Save More Tomorrow (SMarT) program, field-tested at a midwestern manufacturer in 1998, let employees pre-commit today to automatically increasing their 401(k) contribution rate by a set percentage at each future pay raise, with the option to opt out at any time — but requiring an active decision to stop rather than an active decision to keep contributing more.
the payoff
Participating employees' savings rates rose from an average of 3.5% to 13.6% of pay over 40 months, with 78% of participants still enrolled through four subsequent pay raises rather than opting out. The program has since scaled to more than 15 million American workers, and in December 2022 the US Congress made auto-escalation a required default feature of most new 401(k) plans under the SECURE 2.0 Act, effective 2025.
what came after
Save More Tomorrow is a foundational case in behavioral economics and libertarian paternalism, cited alongside default-opt-out organ donation and Nudge-style choice architecture as proof that timing a beneficial commitment against future rather than present resources can neutralize loss aversion at essentially zero cost — the same auto-escalation logic now underlies retirement, savings and even carbon-offset programs designed to convert stated intentions into sustained behavior.
references
- [1]Why Planning To "Save More Tomorrow" Actually WorksKitces.com, 2023kitces.com
- [2]Save More Tomorrow™: Using Behavioral Economics to Increase Employee SavingUCLA Anderson School of Management, 2004anderson.ucla.edu