As firms switch from defined-benefit plans to defined-contribution plans, employees bear more responsibility for making decisions about how much to save. The employees who fail to join the plan or who participate at a very low level appear to be saving at less than the predicted life cycle savings rates. Behavioral explanations for this behavior stress bounded rationality and self-control and suggest that at least some of the low-saving households are making a mistake and would welcome aid in making decisions about their saving. In this paper, we propose such a prescriptive savings program, called Save More Tomorrow � (hereafter, the SMarT program). The essence of the program is straightforward: people commit in advance to allocating a portion of their future salary increases toward retirement savings. We report evidence on the first three implementations of the SMarT program. Our key findings, from the first implementation, which has We are grateful to Brian Tarbox for implementing the Save More Tomorrow � plan and for sharing the data with us. We would also like to thank many people at the following

All around the world, in both the public and private sectors, retirement plans are shifting away from “defined benefit” plans toward “defined contribution” plans. Poterba, Venti, and Wise (2006), for example, followed the cohort of Americans who were 45 years old in 1984 and report a decrease in defined benefit plan coverage from about 40 percent to 20 percent and a corresponding increase in defined contribution plan coverage from about 5 percent to more than 30 percent. Defined contribution plans have many attractive features for participants, such as portability and flexibility, but these attractions come with an increased responsibility to choose wisely. The plans also provide economists with an attractive domain in which to study saving behavior. The standard economic theories of saving (like the life-cycle or permanent income models) contain three embedded rationality assumptions, one explicit and two implicit. The explicit assumption is that savers accumulate and then decumulate assets to maximize some lifetime utility function (possibly including bequests). The first implicit assumption is that households have the cognitive ability to solve

This paper assesses the impact of increasing financial access on low-income people savings. Effects on households’ saving rates and on different informal savings instruments are considered. The paper uses an exogenous expansion of a Mexican savings institute, targeted to low-income people, as a natural experiment and the 1992 and 1994 National Surveys of Income and Expenditures. Results show that the expansion increased the average saving rate of affected households by more than 3 to almost 5 percentage points. The effect was even higher for the poorest households in the sample: their saving rate increased by more than 7 percentage points in some cases. Furthermore, the expansion, in general, had no effect on highincome households. In the case of informal savings instruments, evidence of crowding out of these instruments caused by the expansion is limited. Results do not rule out the possibility that a considerable fraction of the increase in households’ savings could have come from new savings.

literacy questions. Yuni Yan and Hiroaki Matsuura provided excellent research assistance.

Expanding access to financial services holds the promise to help reduce poverty and spur economic development. But, as a practical matter, commercial banks have faced challenges expanding access to poor and low-income households in developing economies, and nonprofits have had limited reach. We review recent innovations that are improving the quantity and quality of financial access. They are taking possibilities well beyond early models centered on providing “microcredit ” for small business investment. We focus on new credit mechanisms and devices that help households manage cash flows, save, and cope with risk. Our eye is on contract designs, product innovations, regulatory policy, and ultimately economic and social impacts. We relate the innovations and empirical evidence to theoretical ideas, drawing links in particular to new work in behavioral economics and to randomized evaluation methods.

The exact cause of the massive defaults and foreclosures in the U.S. subprime mortgage market is still unclear. This paper investigates whether a particular aspect of borrowers ’ financial literacy, their numerical ability, may have played a role. We measure several aspects of financial literacy and cognitive ability in a survey of subprime mortgage borrowers who took out mortgages in 2006 and 2007, and match these measures to objective data on mortgage characteristics and repayment performance. We find a large and statistically significant negative correlation between numerical ability and various measures of delinquency and default. Foreclosure starts are approximately two-thirds lower in the group with the highest measured level of numerical ability compared to the group with the lowest measured level. The result is robust to controlling for a broad set of socio-demographic variables and is not driven by other aspects of cognitive ability, or the characteristics of the mortgage contracts. Our results raise the possibility that limitations in certain aspects of financial literacy played an important role in the subprime mortgage crisis.

This study is the first quantitative look at the effects of financial education on savings outcomes for the poor in Individual Development Accounts. The findings suggest that financial education has sizeable effects, and that courses need not be long to take advantage of them. Marketing and public-policy implications are noted.

This paper examines the relationship between income and saving performance in Individual Development Accounts (IDAs). We first discuss theories of saving. Next, for IDA participants in the American Dream Demonstration, we look at income sources and distribution, followed by tabulations of income and IDA savings outcomes. Following this, we discuss results from regression analyses on IDA savings outcomes. We find that the IDA savings amount did not increase with income, and that the IDA savings rate decreased with income. Although the data do not reveal exactly what caused this, we believe that institutional factors in IDA programs played an important role.

Abstract: The U.S. household carries over $7,500 in uncollateralized debt and likely saves at a negative rate. There is a growing body of evidence that this borrowing and saving behavior may not, as assumed by standard economics, be the product of rational financial planning. This paper discusses insights from behavioral economics on how self-control problems could play a crucial role in determining such financial outcomes. It is important to note that self-control problems, as defined in this paper, are thought of as an issue affecting all people, not just those involved in our specific research. The paper reports results from a field study targeted to low-to-moderate income individuals conducted in Dorchester, MA. It links measured self-control to borrowing and savings outcomes taken from individual credit reports and survey questions respectively. We find that self-control problems are associated with higher borrowing, specifically on credit cards, and lower savings of income tax refunds. The paper discusses how policy prescriptions built around addressing selfcontrol issues could prove helpful in improving financial outcomes.

Using data from the Surveys of Consumers, we explore patterns of financial behaviors (cash flow management, saving, and investing) and the characteristics and learning preferences of households exhibiting these patterns. We find a wide range in diversity of financial behaviors among U.S. households. The only variables that consistently influenced having a high score for cash flow, saving, and investing behaviors were financial knowledge and financial learning experiences – those who knew more and those who learned from family, friends, and personal experiences had higher scores. The implication is that increases in knowledge and experience can lead to improvements in financial behaviors. We argue that one way to increase knowledge is to gain additional education, although we acknowledge that education is only one mechanism for influencing behavior. We conclude that a “one size fits all ” and a “one delivery technique fits all ” approach to financial education will be less effective than more targeted, tailored approaches. 1.