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