Save More Tomorrow

The following is from: Richard Thaler and Shlomo Benartzi, “Save More Tomorrow: Using Behavioral Economics to Increase Employee Savings,” Journal of Political Economy 112(2004): S164-S187. 


Over the past decade, there has been a rapid change toward defined-contribution plans that require employees to actively join and select their own savings rate. For those workers who are eligible only for a defined-contribution plan and elect not to join or to contribute a token amount, savings adequacy may be much lower. One hint at this comes from Gustman and Steinmeier’s analysis of workers who do not have pensions. The adequacy levels of their wealth and savings are substantially lower than those with pensions. Indeed,those workers with pensions are wealthier by approximately the value of their pension.1 For whatever reason, some employees at firms that offer only definedcontribution plans contribute little or nothing to the plan. In this paper, we take seriously the possibility that some of these low-saving workers are making a mistake. By calling their low-saving behavior a mistake, we mean that they might characterize the action the same way, just as someone who is 100 pounds overweight might agree that he or she weighs too much. We then use principles from psychology and behavioral economics to devise a program to help people save more. The program is called Save More Tomorrow (or SMarT), and the basic idea is to give workers the option of committing themselves now to increasing their savings rate later, each time they get a raise. We report extensive data on one firm that implemented the program in 1998 and preliminary data on two other firms that implemented it recently.


Our goal was to design a program to help those employees who would like to save more but lack the willpower to act on this desire. On the basis of the principles discussed so far, we have proposed a program we call Save More Tomorrow. The plan has four ingredients. First, employees are approached about increasing their contribution rates a considerable time before their scheduled pay increase. Because of hyperbolic discounting, the lag between the sign-up and the start-up dates should be as long as feasible.6 Second, if employees join, their contribution to the plan is increased beginning with the first paycheck after a raise. This feature mitigates the perceived loss aversion of a cut in take-home pay. Third, the contribution rate continues to increase on each scheduled raise until the contribution rate reaches a preset maximum. In this way, inertia and status quo bias work toward keeping people in the plan. Fourth, the employee can opt out of the plan at any time. Although we expect few employees to be unhappy with the plan, it is important that they can always opt out. Knowledge of this feature will also make employees more comfortable about joining.

At this time we have three implementations on which we can report, each done rather differently. The particular design features were generally not selected by us but, rather, reflect the preferences of the firms that have adopted the plan. In this type of field research, we, the academic investigators, have quite limited control over many of the details, especially if compared with a laboratory environment. Nevertheless, it is not possible to study actual household savings behavior in a lab, so we are grateful for the data we are able to report here.


The first implementation of the SMarT plan took place in 1998 at a midsize manufacturing company (which prefers to remain anonymous).

Of the 286 employees who talked to the investment consultant, only 79 (28 percent) were willing to accept his advice, even with the constraint that recommended increases were usually no more than five percentage points. For the rest of the participants, the planner offered a version of the SMarT plan as an alternative, proposing that they increase their saving rates by three percentage points each year, starting with the next pay increase. This was quite aggressive advice, since pay increases were barely more than this amount (approximately 3.25 percent for hourly employees and 3.50 percent for salaried employees). The pay increases were scheduled to occur roughly three months from the time the advice was being given.With the 3 percent a year increases, employees would typically reach the maximum tax-deferred contribution within four years. Even with this aggressive strategy of increasing saving rates, the SMarT plan proved to be extremely popular with the participants. Of the 207 participants who were unwilling to accept the saving rate proposed by the investment consultant, 162 (78 percent) agreed to join the SMarT plan. More important, the majority of these participants did not change their mind once the savings increases took place. Only three participants (2 percent) dropped out of the plan prior to the second pay raise, with 23 more (14 percent) dropping out between the second and third pay raises and six more (4 percent) between the third and forth pay raises.8 Hence, the vast majority of the participants (80 percent) have remained in the plan through four pay raises. Furthermore, even those who withdrew from the plan did not reduce their contribution rates to the original levels; they merely stopped the future increases from taking place. So, even these workers are saving significantly more than they were before joining the plan.

The second and third implementation can be found in the paper.


The initial experience with the SMarT plan has been quite successful. Many of the people who were offered the plan elected to use it, and a majority of the people who joined the SMarT plan stuck with it. Consequently, in the first implementation, for which we have data for four annual raises, SMarT participants almost quadrupled their saving rates. Of course, one reason why the SMarT plan works so well is that inertia is so powerful. Once people enroll in the plan, few opt out. The SMarT plan takes precisely the same behavioral tendency that induces people to postpone saving indefinitely (i.e., procrastination and inertia) and puts it to use.

Primary Institution – University of Chicago

Secondary Institutions – University of California

Chicago University


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