AutoSave

Last year the United States had a negative personal savings rate for the first time since the Great Depression, contributing to a historically low national saving rate. If low saving persists over an extended period of time, it will drain resources available for potentially productive investments, undermine economic growth and foster economic insecurity. Recent findings from the field of behavioral economics and institutional savings theory provide valuable insights into what it would take to turn America back into a saving nation. Specifically, the value of savings plans and default policies provides a constructive platform to facilitate savings. Savings plans bundle support structures that offer participants access to savings products and information, limited investment options, and low-cost administration. Default policies, such as direct deposit and automatic enrollment in savings plans, can be highly significant drivers of economic behavior. However, many Americans do not have access to these savings tools.

An alternative policy is proposed, called AutoSave, which would serve as a universal savings plan accessible to all workers. Under this plan, employers that make payroll deductions will be required to make deposits to the AutoSave system on behalf of their employees and the self-employed would be able to make deposits into the system at their discretion. Employers will shoulder no extra costs but will facilitate automatic deposits. AutoSave will offer a limited set of low-cost investment options, such as index funds, which would be administered by professional money managers. Money deposited in this system belongs to the individuals and since deposits will be from after-tax dollars, normal tax rules apply. Individuals will have the flexibility to opt-out of the system or drawn down on their funds at any time. A default contribution rate can be set at 2% of pay. At this rate, someone earning $50,000 a year would have $1,000 diverted directly into savings, which could grow with responsible stewardship. Additional targeted incentives could be applied to encourage longer-term savings, but AutoSave would be designed to take advantage of one of the most tried and true savings techniques—inertia.