A Nudge or a Revolution

While some may call the insights of behavioral economics a Nudge (see Ellen’s post below), others throw caution to the wind and have proclaimed a revolution. Our friends at the Brookings Institution and the Retirement Security Project have convened an informative conference today titled “The Automatic Revolution: Changing How America Saves.”

This gathering is focusing on the deployment of automatic features that promote savings. Brookings and RSP have been major developers and promoters of the Automatic 401K, which stives to operationalize Thaler’s Save More Tommorow scheme as well as the Automatic IRA which strives to fill the void created by all of the employers who don’t offer access to retirement savings plans. Mark Iwry, David John, and Bill Gale have continually produce insightful analysis and elegant policy proposals. Both of these are gaining some traction, largely because of the growing concensus that the decline of traditional pensions and the rise of relying on IRAs and 401k savings will leave many feeling a bit short.

What I like to emphasize about their proposals which sometimes they don’t herald enough is that both proposals depend on accessing savings plan features. Their IRA doesn’t just float out their as an account with unlimited choices and potentially high fees, but it is embedded in a savings plan structure which offers a host of valuable institutional support structures. A major part of the policy innovation here is ensuring that everyone has access to these savings plan features.

We certainly need to identify policies to get the saving incentives to move in the right direction, which some of these automatic features can do. The challenge is to figure out the right defaults and embed them directly into the choice architecture which employers use to help thier employees save. Here at New America, we have an interest in expanding this powerful insight into other non-retirement savings. That is why we are exploring the potential to use automatic defaults to support flexible savings, which may be of particular value to lower and middle income families.

We may have to wait a bit longer before confirming the revolutionary impact of these insights, but at this point I’d settle for the nudge of soft paternalism.