What works in encouraging saving?

Giselle Cory examines the state of 'nudge'-based programs that encourage saving gently; they may help, but they can't overcome poverty alone.

 

Giselle Cory is a senior research and policy analyst at the Resolution Foundation

There are many tricks that can be used to encourage more saving – but we don’t know if any of them work. That is the finding from a new report from the Institute of Fiscal Studies. In looking outside classical economics to understand what drives savings, the authors pinpoint four areas: financial incentives; information, education and training; choice architecture; and social marketing.

If the word “nudge” is going through your head right now, you’d be right: this is the stuff of behavioural economics. Though the lessons from this field of research have been part of policymaking for some time, they have never been more explicitly so than now (see the work of the government’s behavioural insights team).

Whether or not these methods are the best (or most appropriate) ways to get people saving is one question the IFS have tried to tackle. But do households need to be encouraged to save more in the first place?

For people on low to middle incomes, savings of any form can be hard to build up: quite simply, most just don’t have much spare cash to put aside. In fact, two out of three low to middle income households have less than one month’s income in savings. Two-fifths reported making no savings whatsoever in 2010.

Among those who do save, the average amount has fallen in real terms from £229 a month in 1992 to £159 in 2010. Moreover, saving in low to middle income families in the UK is low in comparison to other countries and has not kept pace with incomes.

In itself, this might not be a problem. If households are choosing not to save and have other methods to protect themselves from sudden shocks in income or expenditure, cash savings might not be essential.

However, as the Resolution Foundation’s recent report shows, nearly half of low to middle income families would like to save at least £10 a month but can’t afford to do so. The proportion of people feeling this way increased immediately prior to the recession and, unsurprisingly, has continued to rise throughout the current downturn.

Moreover, of those planning a decrease in their savings in the year ahead, nearly half say it is due to the higher cost of essentials like food and bills and a third because of lower income.

So for many their savings situation is far from ideal. Would a nudge help?

As IFS’s report makes clear, evidence on the effectiveness of policies to encourage saving is mixed. The report highlights the difficulty of assessing the impact on long-term household savings due to limited or poor data. Yet it concludes that, rather than being an excuse for inaction, this lack of evidence is a strong reason to try out and better evaluate our more promising approaches.

A glance at some of the data on financial incentives suggests some areas with promise. Changes in choice architecture, like the auto-enrolment pension scheme rolling out later this year for example, can have a substantial effect. Matched savings accounts, like the now-defunct Savings Gateway, encouraged people to save more – at least over the short-term.

These accounts represented a fundamental shift for the UK, breaking from a tradition of using the tax system to encourage savings, and early evidence suggested they might be having an impact.

Ultimately, the short-term nature of evaluation for the Savings Gateway means that we don’t know if immediate changes in savings behaviour would continue over the longer term.

That said, given the scheme’s focus on adults on very low incomes, and largely reliant on benefits, achieving any effect will have been hard. Targeting a slightly higher income group—those on low incomes but in work, for example—might better help us learn to walk before we can run.

In one sense, with money so tight, you might think this is all for the birds. Yet these discussions gain added importance when you consider how we currently spend public money to support savings.

With the abolition of matched savings accounts, the savings landscape is now dominated by pension tax relief and individual savings accounts (ISAs) – two schemes that we know disproportionately benefit the rich.

This week’s proposals from the Social Market Foundation to half top rate pension tax relief and cap savings accounts at £15,000 shows how lively this debate could yet become.

One thing is clear: with so many low to middle income households still not saving as much as they would like to, there is a clear need to help people into a better savings position. The IFS sets out some promising evidence. If many families simply can’t stretch their budgets to put money aside they will need more than a nudge to fill the piggy bank.

See also:

IDS jumped the gun: Gangs had nothing to do with the riots – Ben Mitchell, November 10th 2011

Preventable killers are no longer just a western problem – Guppi Bola, September 20th 2011

Will Osborne sell out “greenest government ever” in Budget? – Dominic Browne, March 21st 2011

Public health aspirations undermined by wider coalition policies – Trevor Cheeseman, December 1st 2010

Changing Behaviour Change – Jonathan Rowson, June 15th 2010

23 Responses to “What works in encouraging saving?”

  1. Political Planet

    A nudge can help saving, but only if there’s room in the budget to start: Giselle Cory examines the state of 'nu… //t.co/PnsWpT5b

  2. Martin Steel

    A nudge can help saving, but only if there's room in the budget to start, writes @GiselleCory of @ResFoundation: //t.co/AAmSEWVo

  3. Patron Press - #P2

    #UK : A nudge can help saving, but only if there ’s room in the budget to start //t.co/ZwFblTka

  4. Pulp Ark

    A nudge can help saving, but only if there’s room in… //t.co/VzpVjVXf #Sustainable_Economy #nudge #Nudge_theory #muslim #tcot #sioa

  5. Giselle Cory

    A nudge can help saving, but only if there’s room in the budget to start //t.co/Mm9tPWwe

  6. James Plunkett

    What works in encouraging saving? New blog from @resfoundation's @gisellecory – //t.co/Q1Jym5gt

  7. leftlinks

    Left Foot Forward – A nudge can help saving, but only if there’s room in the budget to start //t.co/tvFZilYu

  8. ResolutionFoundation

    A nudge can help saving, but only if there’s room in the budget to start – latest blog from @gisellecory //t.co/pUGseR6P

  9. Anonymous

    In looking outside classical economics to understand what drives savings, the authors pinpoint four areas: financial incentives; information, education and training; choice architecture; and social marketing.

    =========

    What about force?

    The government forces people to hand over NI, in exchange for a piss poor pension.

    What about not forcing people to hand over NI, but forcing them to save the NI instead?

  10. Anonymous

    This week’s proposals from the Social Market Foundation to half top rate pension tax relief and cap savings accounts at £15,000 shows how lively this debate could yet become.

    ===========

    So removing the tax deferral, because there is no relief from taxation.

    That means taxed on income. Taxed on the investment. Taxed on the income. Taxed on spending. Taxed on death.

    Just how much tax do you want to extract from pensioners?

  11. Anonymous

    If many families simply can’t stretch their budgets to put money aside they will need more than a nudge to fill the piggy bank.

    ===============

    Or the government can stop taking so much money off them, and require them to direct the money into savings.

  12. ResolutionFoundation

    What works in encouraging saving? New blog by @gisellecory //t.co/Myfa8Y43 via @leftfootfwd

  13. Ed's Talking Balls

    Well, quite.

    But government doesn’t give a fig about taxing the populace into oblivion.

  14. Anonymous

    It’s the plan.

    Labour gets their high taxes.

    Condems get their small government.

    The rest of us get shafted.

    It’s the plan.

  15. Newsbot9

    Oh yes, I’m sure you’d LOVE a mandate giving the banks money from everyone, ripped from the money the poor need little non-essentials like food. Typical right winger.

  16. Newsbot9

    Because getting millions of people’s savings wiped out on a regular basis by market crashes isn’t a good idea. In fact, market-linked pensions are scams.

  17. Newsbot9

    Oh yes, oblivion. Wait. Which countries are doing better? Oh, never mind, you’re the one calling for oblivion.

  18. Anonymous

    I’ve always said – no money for the banks. Let them go bust.

    The poor need the essentials, so I’m in agreement with you there. I would push it farther, and say they need more than the essentials.

    So why is taxing the poor (min wage) 2,500 pounds a Labour party policy?

    Nothing like kicking the poor is there.

  19. Anonymous

    Well, look at Greece, Hungary, Argentina. Pensions confiscated by governments.

    What you are really trying to say is that the state pension gives you more income than the equivalent private pension, if the money had been invested.

    However, on that you are wrong. Diverting NI to a pension results in more money, even after the awful FTSE performance recently.

    So the private is better, by a long way. Median wage earn, 19K instead of 5K from the state.

    Now, if the state regulated the charges down, it would be even better.

  20. Newsbot9

    Nothing like trying to manoeuvre the poor into being “feckless non-payers”.

    And I wouldn’t know, I don’t kick poor people.

  21. Ed's Talking Balls

    Yes you do. You stamp on their faces by espousing high taxes for the poorest in society.

  22. Newsbot9

    Nope, that’s you. You want them to have to pay massive amounts for healthcare, for example.

    I support things which will actually help the poorest. Being on minimum wage is FAR from the lowest wages out there, thanks to the millions of involuntary part-time workers the Tories have created.

    I’m concerned if people are starving and freezing, not if they can afford beer and fags. But you keep on focusing on your own priorities.

  23. Newsbot9

    No, I am saying nothing of the sort, you’re making things up again.

    And no, 2.7K given the actual market. And that’s before the millions who would have nothing because of the costs of purchasing American-style healthcare, as you repeatedly call for, and hence would have no pension whatsoever in your scheme.

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