The personal saving rate in America is a puny 5.1 percent, but it wasn’t always so. In fact, the saving rate was over 7 percent in 1995 and a stunning 17 percent in May 1975. How can we pump it back up?
More specifically, what can be done to encourage more low- and middle-income people to save? I don’t mean just for retirement, either. I mean emergency savings for urgent, steep, unforeseen expenses, too: 25 percent of Americans have no emergency savings and 67 percent have a rainy day fund equal to less than six months’ expenses, according to Bankrate.com.
One answer may be: Offer prizes.
That may sound a bit nutty, but some sharp savings analysts don’t think so. And a new federal law will see if they’re right.
When you say: Put a dollar away and there’s a chance for something good to happen, you start to mess with the sense of delayed gratification.
— Tim Flacke, Doorways to Dreams Fund
“Prized-linked savings” — an example of gamification — was just one of several intriguing ideas discussed at the webinar panel I watched Tuesday, Starting to Save: Innovations for Working America, from the Bipartisan Policy Center and the Center for Financial Services Innovation think tanks.
The New Law Offering Savers Prizes
That’s where I heard about The American Savings Promotion Act, a little-known law Congress passed in late 2014 that lets banks and credit unions offer customers cash-prize savings lotteries and raffles.
“We need to help people save money. When you don’t have savings, it makes it a lot harder to weather the storms,” said Rep. Derek Kilmer, (D-Wash.), a co-sponsor of the law, at the savings panel. “Too often, savings is looked at as a chore.”
In states where prized-linked savings have been permitted, Kilmer said, “we’ve seen success with people opening accounts who never had one before and saving more than they would otherwise.”
Between 2009 and 2013, 50,076 people — mostly “financially vulnerable” — signed up for Save to Win programs permitted at 62 credit unions in Michigan, Nebraska, North Carolina and Washington and designed by the nonprofit Doorways to Dreams Fund, a group working to boost financial security. Each earned a raffle ticket for every savings deposit of $25, offering them a chance to win monthly prizes of up to $3,750 or annual prizes of as much as $10,000.
The Save to Win customers salted away more than $94 million; $921 to $2,662 per account, on average.
Those impressive numbers helped inspire the new federal law.
“One of the advantages of using prizes in connection with savings is that usually there’s a bargain with savings: do it today and you’ll be in a better position tomorrow,” said panelist Tim Flacke, executive director of Doorway to Dreams Fund. “For all of us, that’s a tough sell. But when you say: Put a dollar away and at the end of the month or year there’s a chance for something good to happen, you start to mess with the sense of delayed gratification.”
As the $70 billion spent each year on lottery tickets shows, an element of surprise is, as Flacke says, “a very powerful form of entertainment.”
Now that all banks and credit unions have the ability to offer cash prizes to savers (much better than a toaster, if you ask me), it’ll be interesting to see how many ramp up prize-linked savings programs.
A Split 401(k) for Emergencies and Retirement
Panelist David John, deputy director of the Retirement Security Project at the Brookings Institution think tank, offered another intriguing idea to get people (especially ones with low- and moderate incomes) to save: a split 401(k).
John is concerned about Americans’ lack of emergency savings and thinks split 401(k)s would help: These automatic-enrollment plans would let workers stuff a portion of their pay into federally insured passbook-like savings funds with penalty-free withdrawals and also put away cash for retirement, with the standard hands-off rules. They’d also help prevent employees from pulling money out of their 401(k)s for reasons other than retirement.
“We need an approach that allows for a wide variety of savings for different purposes,” John said. His idea resembles one I wrote about previously on Next Avenue, from six retirement experts at Harvard, Yale and Cambridge. That one described the split 401(k) as having a Freedom account and a Savers account.
“I don’t see this as counter to prize-linked savings,” said John. “I see it as a complementary approach.”
At the webinar panel, Sen. Susan Collins (R-Maine), chairman of the Senate Special Committee on Aging, said she thinks the split 401(k) idea is “ingenious and very much worthy of consideration.” (Props to her for revealing that “in my youth, I made a colossal error of withdrawing all the money in my federal pension plan to buy a car.”) Collins said if she’d had a split 401(k), “I don’t think I would have made such an ill-advised decision.”
Putting the Savers Tax Credit on the EZ Form
Collins also spoke about a bill she’s pushing that would let taxpayers using the 1040-EZ short form claim the Savers Tax Credit. Absurdly, even though that credit is targeted to low- and middle-income taxpayers, you can’t take it with the EZ. “It makes no sense,” said Collins. Fellow panelist Jason Fichtner, a senior research fellow at George Mason University, also favored the EZ idea.
Personally, I think the prize-linked savings, split 401(k) plan and revamped 1040-EZ ideas are worth trying. And I’m hoping states pick up on the Obama administration’s announcement at the White House Conference on Aging Monday to create programs allowing all their employed residents to save money through payroll deduction even if their employers don’t offer retirement plans.
Collins told the webinar watchers: “There will be a tsunami of retirees who are going to lack funds for a comfortable retirement.” Maybe cash prizes, split 401(k)s and other innovative ideas can turn that tsunami to just a capillary wave.
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