NEW YORK • There is a good chance Americans are saving more for retirement because of Professor Richard Thaler, who was awarded the Nobel prize for economics on Monday.
Over the last few decades, as more and more American employers killed off their pensions, workers were offered 401(k)s or similar retirement plans, with defined contributions instead of defined benefits. These voluntary accounts should have worked since economic theory assumes people act rationally: Workers, left to their own devices, should save and invest properly to meet their long-term goals.
But Prof Thaler and other adherents of behavioural economics pointed out that workers saving for retirement can be their own worst enemies. Without help, Prof Thaler argued, they'll never retire. For years, he championed the idea that employees should be "nudged" into joining retirement plans, a concept known as automatic enrolment. Rather than waiting for workers to fill out 401(k) paperwork, employers should automatically sign them up for the plans, and give uninterested employees the option to opt out.
In a survey last year, 58 per cent of plans were automatically signing up workers. That's up from just 8.1 per cent in 2000.
Prof Thaler didn't come up with the idea of automatic enrolment. He did, however, develop the notion of automatic escalation, also called "save more tomorrow", along with behavioural economist Shlomo Benartzi. The goal of auto-escalation is to boost how much workers are saving.
Setting aside 15 per cent of your salary can feel impossible. But auto-escalation addresses this by nudging workers to agree to future increases in their savings rates, usually by 1 percentage point each year. Auto-escalation can have a big impact on savings rates, analysis shows.
In Prof Thaler's world of defaults and nudges, the wrong kind of "nudges" can be destructive. Many companies encourage workers to invest much of their retirement in company stock, something he has argued is too risky for workers.
He also says many companies are encouraging workers to save too little. Still, the best-designed nudge in the world won't get someone to save enough for retirement if he or she simply isn't being paid enough.