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Using Financial Innovation to Support
Savers: From Coercion to Excitement
National Poverty Center Conference
“Access, Assets, and Poverty”
Peter Tufano
Harvard Business School,
D2D Fund, and NBER
Daniel Schneider
Princeton University
Agenda
ƒ Purpose of paper
ƒ Categorizing savings levers
ƒ The savings continuum
ƒ The many unanswered questions
Purpose of the paper
ƒ Private savings—especially short term emergency
savings—is a critical buffer for poor families
ƒ Policy solutions often deal only with long-term
retirement solutions, or propose expensive solutions.
ƒ What is the menu of savings possibilities, supported
by a combination of government, private sector, and
NGOs?
ƒ Not a relative evaluation—more to establish the
landscape.
What is the value of laying out the
possibilities?
ƒ People are different.
ƒ
ƒ
ƒ
Savings goals (retirement vs. emergency)
Institutional settings (large employer vs. small/temporary
employer)
Mental makeup (right brain vs. left brain)
ƒ Any one savings proposal—no matter how good--
cannot address all needs.
ƒ Reframe the discussions more broadly, to bring in
NGOs and private parties.
ƒ
Not everything requires change in law or big money.
Along what dimensions do savings
solutions differ?
ƒ Degree of saver decision making
ƒ
None ÅÆ Complete
ƒ Perceived barrier to savings
ƒ
ƒ
ƒ
ƒ
Not enough resources to save
Institutional impediments
Individual inertia
Perceived benefits of savings too small
ƒ Savings “partner”
ƒ
Government, private sector, NGOs
ƒ Economics to partner
ƒ
Expensive ÅÆ Profitable
How can we support families?
1.
Force them to save
2.
Make it hard for them not to save
3.
Make it easy for them to save
4.
Bribe them to save
5.
Social support for savings
6.
Make them excited to save
A continuum of savings levers
Force to Save
Hard Not to Save
Easier to Save
Bribe to Save
Social Support
Fun or Exciting
Savings
Current
barrier
All (ability and will)
Saver's
Role
No choice
Must refuse to
save
Given more
opportunities, but
must decide
Likely
partner
Government
Workplace,
financial service
vendors
(Government OK)
Retail sector,
workplace, tax sites
Government,
Foundations
Communities
For profit financial
service firms
(Government OK)
Cost or
Profit
Potential
High cost (grants);
medium cost (mandate)
Generally low cost
Medium cost (new
channels); low cost
(tax channel)
High cost
(matches,
bonuses)
Low $ cost;
high effort by
community
Potential for
profits
Typical
savings
horizon
Long horizon
Varies
Varies
Long horizon
Short horizon
Short horizon
Example
Mandate (Social
Security); Grant (Child
Trust)
Opt ins; Bundling;
Commitment
Products
New distribution
Channels; SMarT
401k, IDAs,
Savers Credit
ROSCAs
Prize linked
saving, collectible
savings
Institutional impediments, inertia
Savings not "worth it"; Change savings equation
Given different savings opportunities, but must decide
1. Forcing families to save
ƒ Mandating savings
ƒ
Social Security system
ƒ Granting savings
ƒ
U.K. Child Trust Fund
ƒ
ƒ
ƒ
ƒ
All children born in UK post September 2002
Progressive grant at birth
Investment choice with default option
SEED demonstration and the ASPIRE Act
Example: The UK Child Trust Fund
ƒ
Opportunity
ƒ
ƒ
ƒ
Performance
ƒ
ƒ
ƒ
2.85 million accounts open as of June 2007
Approximately 25%- 30% of CTF accounts receiving regular deposits
Provider and Cost
ƒ
ƒ
ƒ
Low-income children receive additional funds
Large pre-program gap in savings for children by household income
Public Sector
£240 to £480 million annually
Concerns
ƒ
ƒ
ƒ
Re-shuffling of assets
Inter-cohort inequality
Stake-blowing
2. Making it hard not to save
ƒ
Defaults
ƒ
ƒ
ƒ
401(k) plans
Pension reform
Bundling
ƒ
Card-based savings programs
ƒ
ƒ
ƒ
Loan based program for bundled savings
ƒ
ƒ
Bank of America “Keep the Change” debit card program
UPromise Rewards Program
North Carolina State Employees’ State Credit Union
Making it hard to dis-save
ƒ
Commitment Savings products
Example: 401(k) defaults
ƒ
Opportunity
ƒ
ƒ
ƒ
Performance
ƒ
ƒ
ƒ
Significant enrollment boost (up to 90% level)
Disproportionate enrollment and balance benefit to low-income and
racial/ethnic minority group members
Provider and Cost
ƒ
ƒ
ƒ
Increase employee retirement savings
Satisfy non discrimination test rules
Employer provided
Low/medium cost: compliance, additional match dollars
Concerns
ƒ
ƒ
ƒ
Relatively low levels of plan access among LI families
Default contribution rates and allocations are sticky
Limited evidence on re-shuffling
Example: The Salary Advance Loan
ƒ
Opportunity
ƒ
ƒ
ƒ
Performance
ƒ
ƒ
ƒ
ƒ
$400 million in loans at maximum fee of $5 per loan
$9.7 million in deposits
75% of SALO borrowers report that these funds are their first real savings
Provider and Cost
ƒ
ƒ
ƒ
Reduce reliance on costly AFS loan products
Help create savings for low-income families
Private sector
Low cost, profitable for the credit union
Concerns
ƒ
ƒ
Actually new savings?
Sustainable on a broader scale by non-cooperative financial institutions?
3. Making it easy to save
ƒ The Workplace
ƒ
SMarT Plan (Benartzi and Thaler, 2004)
ƒ Tax Preparation Sites
ƒ
Refund-linked savings (Beverly, Schneider and
Tufano, 2006)
ƒ Schools
ƒ Retail Point of Sale
Example: Tax time savings
ƒ
Opportunity
ƒ
ƒ
ƒ
ƒ
ƒ
Performance
ƒ
ƒ
ƒ
ƒ
Some demand for savings accounts at VITA sites (Beverly, Tescher, and
Romich, 2004; Rhine, Su, Osaki, and Lee, 2005)
H&R Block has opened 600,000 IRA and Savings accounts
Refund Splitting may facilitate savings (Beverly, Schneider, and Tufano,
2007)
Provider and Cost
ƒ
ƒ
ƒ
$110 Billion to families making less than $40,000 per year (2005)
Average EITC refund of $1,900
Savable funds (Smeeding, Ross-Phillips, and O’Conner, 2000; Barrow
and McGranaham, 2000; Barr and Dokko, 2006)
Form 8888
Public Private Sector partnerships
Small scale legislative/rule changes dramatically lower costs and allow
for private sector innovation and involvement
Concerns
ƒ
ƒ
Point of sale access to savings products
Universal savings product – US Savings Bonds?
4. “Bribing” people to save
ƒ
In general, the U.S. government spends $335 billion each
year on promoting asset building (Woo, Schweke, and
Bucholz, 2004))
ƒ
Most in the form of tax subsidies
ƒ
ƒ
ƒ
ƒ
Some support for low-income savers
ƒ
ƒ
ƒ
Mortgage tax deduction
Retirement savings tax treatment
Preferential capital gains rates
Individual Development Accounts
Saver’s Credit
“Anti-Bribes” may discourage savings
Example: Individual Development Accounts
ƒ
Opportunity
ƒ
ƒ
ƒ
Provider and Cost
ƒ
ƒ
ƒ
Federally financed, administered through financial institutions and small
not-for-profit groups
At scale, high cost
Performance
ƒ
ƒ
ƒ
ƒ
Encourage saving by low-income households
Equalize governmental expenditures on asset-building incentives
Mean (median) monthly saving in ADD of $19 ($10) (Schreiner et al, 2006)
Higher savings among poorer participants in ADD
Randomized experimental results show homeownership benefit for African
Americans (Gale et al, 2006)
Concerns
ƒ
ƒ
ƒ
Limited evidence of efficacy
Current model of many small providers may not be scalable
Stalled in Congress
5. Non-monetary incentives to save
ƒ
Savings is a “not” activity
ƒ
Group support helpful for “not” activities
ƒ
ƒ
Weight Watchers
AA
ƒ
Social networks can deplete financial resources or can help to build
them.
ƒ
Rotating savings and credit associations (ROSCAs) in South America,
Asia, Africa, and immigrant communities in the US
ƒ
America Saves! in the United States
Example: ROSCAs
ƒ
Opportunity
ƒ
ƒ
ƒ
ƒ
Performance
ƒ
ƒ
ƒ
Widespread use in developing countries and in some immigrant enclaves
in more developed countries
Significant source of savings in many countries (Bouman, 1995)
Provider and Cost
ƒ
ƒ
ƒ
ƒ
Use social interaction to motivate savings (Biggart, 2001; Ambec and
Treich, 2007)
Manage family tensions over money (Anderson and Baland, 2002)
Provide a means to establish social standing, engage in social relations,
and build group cohesion (Ardner, 1964; Burman and Lembete, 1995;
Gugertry, 2003)
NGOs, community groups, informal networks
Low dollar, but high social and time costs
May be network enhancing
Concerns
ƒ
ƒ
Basic behavioral solution adaptable?
Usefulness/efficacy in context of greater availability of formal financial
services?
6. Making savings exciting
ƒ
Savings products where people save because they enjoy it?
ƒ
Prize-based savings
ƒ
ƒ
ƒ
ƒ
Early use: Million Adventure (1694) in Great Britain
Nineteenth Century: Most European governments (Levy-Ullmann,
1896)
Twentieth Century: Brazil, United Arab Emirates, Ireland, Great
Britain, Sweden, Pakistan , Pakistan Germany, Turkey, Kenya,
Indonesia, Spain, Mexico, Argentina, Denmark, Oman, New
Zealand, Sri Lanka, India, South Africa
Collectible savings
Example: FNB’s Million a Month Account
ƒ
Opportunity
ƒ
ƒ
ƒ
ƒ
ƒ
Provider and Cost
ƒ
ƒ
ƒ
Private sector product with public regulation
Profit opportunity
Performance
ƒ
ƒ
ƒ
Use new structure to motivate savings - 114 prizes awarded monthly,
R1,000 to R1 Million
Bring unbanked households into the formal South African financial system
Contribute towards equalizing racial financial inequality
Leverage public interest in gambling to increase savings
750,000 accounts opened over about 32 months
R1.2 billion in deposits
Concerns
ƒ
ƒ
Lawsuit in South Africa, legally challenged in the United States
May engender public opposition
Summary: From coercion to excitement
Force to Save
Hard Not to Save
Easier to Save
Bribe to Save
Social Support
Fun or Exciting
Savings
Current
barrier
All (ability and will)
Saver's
Role
No choice
Must refuse to
save
Given more
opportunities, but
must decide
Likely
partner
Government
Workplace,
financial service
vendors
(Government OK)
Retail sector,
workplace, tax sites
Government,
Foundations
Communities
For profit financial
service firms
(Government OK)
Cost or
Profit
Potential
High cost (grants);
medium cost (mandate)
Generally low cost
Medium cost (new
channels); low cost
(tax channel)
High cost
(matches,
bonuses)
Low $ cost;
high effort by
community
Potential for
profits
Typical
savings
horizon
Long horizon
Varies
Varies
Long horizon
Short horizon
Short horizon
Example
Mandate (Social
Security); Grant (Child
Trust)
Opt ins; Bundling;
Commitment
Products
New distribution
Channels; SMarT
401k, IDAs,
Savers Credit
ROSCAs
Prize linked
saving, collectible
savings
Institutional impediments, inertia
Savings not "worth it"; Change savings equation
Given different savings opportunities, but must decide
When to use one lever versus another?
ƒ What impediment is most salient?
ƒ What distribution channels reach the saver?
ƒ What resources will the savings partner contribute?
ƒ What type of saving are we trying to support?
A long-term research agenda
ƒ Savings/“Cost” ratio for different approaches
ƒ
But costs vary widely: direct costs, opportunity costs,
monetary costs, others
ƒ Relative efficacy
ƒ
Most experiments test interventions one at a time
ƒ Impact on total household financial activities
ƒ
ƒ
Incremental gross savings?
Impact on net savings (saving less borrowing)?
ƒ Effect on non-financial outcomes
ƒ
ƒ
Family structure
Network resources