Building a Nation of Savers

The New York Times > Business > Your Money > Economic View: "In October, the nation's households saved just 0.2 percent of their income. And despite the tax advantages conferred by 401(k)'s, individual retirement accounts and other savings vehicles, most people simply refuse to stash much money in them. As of 2001, the most recent data available, only 8.4 percent of 401(k) investors made the maximum contributions, according to Alicia H. Munnell, director of the Center for Retirement Research at Boston College.

The scholars examined what happened at four companies that switched the way they pitched 401(k)'s to employees. When employees were offered the option of signing up for a 401(k) upon hiring, participation rates after six months ranged from 25 percent to 43 percent. Not bad. But when the same companies instituted default enrollment - people were automatically enrolled in the plan when hired but could opt out - participation rates after six months were 86 to 90 percent. In other words, changing the position of the on-off switch essentially doubled the rate.

At a different company, when employees were simply asked to make a decision about whether to participate - yes or no - within 30 days, the rate of enrollment rose to 70 percent from 30 percent.

At root, then, the researchers found, the choice of whether to save comes down more to psychology than to economics. Their approach is squarely in the growing field of behavioral economics, which is gingerly stepping away from the economists' orthodoxy that humans are eternally rational, relentlessly profit-seeking machines. In this schema, our consuming selves are constantly at war with our saving selves. "