The encyclopedia · Finance & Accounting · Financial decision · 2004

Save More Tomorrow tied savings to future raises, not to today.

Thaler and Benartzi's SMarT plan commits employees to save a share of each future raise; saving rates rose from 3.5% to 13.6%.

University of Chicago · UCLA Anderson School of Management

the move

In defined-contribution plans, employees decide how much to save, and many save too little because of self-control and a bias toward today. Thaler and Benartzi wanted a prescriptive program rather than another warning.

Their answer was Save More Tomorrow. At enrollment a worker agrees that their contribution rate will rise with each future salary increase, by a fixed amount, until it reaches a ceiling. Nothing changes today, so joining is painless, and the increases are automatic, so staying requires no effort.

The first implementations were striking: in the flagship program 78% of those offered joined, 80% stayed through four raises, and average saving rates climbed from 3.5% to 13.6% over 40 months. The mechanism turned a difficult present decision into a nearly effortless future one.

why it works

Present bias makes current-income saving painful
Taken from a raise, the increase never feels like a cut in take-home pay
Automatic escalation removes the need for repeated willpower
Inertia then keeps the saver enrolled through multiple raises

the payoffCommit future raises to saving, not current incomeinspired

what transfers

To beat present bias, take the sacrifice from future money and let inertia work: a commitment device outperforms a one-time exhortation.

what came after

Save More Tomorrow became the blueprint for automatic escalation in retirement plans, and its logic informed the Pension Protection Act of 2006, which encouraged auto-enrollment and automatic contribution increases. Such defaults are now standard in US defined-contribution plans.

references

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