Automatic enrollment is in the new Obama budget proposal

On page 37:

Making Saving for Retirement Easier as the Economy Recovers.
Over the long-term families need personal savings, in addition to Social Security, to prepare for retirement and to fall back on during tough economic times like these. However, 75 million working Americans—roughly half the workforce—currently lack access to employer-based retirement plans. In addition, the existing incentives to save for retirement are weak or non-existent for the majority of middle and low-income households. The President’s 2010 Budget lays the groundwork for the future establishment of a system of automatic workplace pensions, on top of and clearly outside Social Security, that is expected to dramatically increase both the number of Americans who save for retirement and the overall amount of personal savings for individuals. Research has shown that the key to saving is to make it automatic and simple. Under this proposal, employees will be automatically enrolled in workplace pension plans—and will be allowed to opt out if they choose. Employers who do not currently offer a retirement plan will be required to enroll their employees in a direct-deposit IRA account that is compatible with existing direct-deposit payroll systems. The result will be that workers will be automatically enrolled in some form of savings vehicle when they go to work—making it easy for them to save while also allowing them to opt out if their family or individual circumstances make it particularly difficult or unwise to save. Experts estimate that this program will dramatically increase the savings participation rate for low and middle-income workers to around 80 percent.

The idea draws praise from bloggers at both Heritage and the Nation. The trend of companies offering automatic enrollment is slowing. Strangely, more than half of them say they aren’t adding automatic enrollment because of the increased costs of an employer match. Strange, since the two can be uncoupled easily.

You really want to read about pension funds, don’t you?

Pension fund talk really gets the blood flowing, doesn’t it? Well, we’re going to try our wonky best.

India’s Pension Fund Regulatory and Development Authority (PFRDA) is the government body responsible for regulating the country’s pension sector. In response to a proposal for new pension system that features defined contribution plans and professional financial funds, the PFRDA recently published a report on recommendations for this new plan. (The paper is no longer online, so special thanks to Amol Agrawal for sending it our way. We’ll post it if it comes back online.)

The paper’s discussion of the default rule is an interesting window into how thinking about default rules for investments has changed over the past decade, and how policymakers in different countries may end up addressing this issue.

Continue reading the post here.

Nudge is out in paperback

The paperback edition of Nudge is out; Published by Penguin Books; Available at fine booksellers everywhere. There’s new material on the financial crisis and lots of new nudge examples in an additional chapter. Plus this spiffy new cover. You can’t miss it on the bookshelf now.

Assorted links

1) Several years back, economists Richard Thaler and Eric Johnson thought a “break-even effect” might exist in the market, where, given past losses, people would look to outcomes that offer a chance to break even fast. Motley Fool thinks it could be why people like penny stocks in a recession.

2) We’ve blogged about how the schedule of food stamps can affect food consumption behavior. It’s not just for food stamps, says the Wall Street Journal. It’s for paychecks.

3) Will lawyers and the Justice Department and the Federal Trade Commission look to behavioral economics when they review merger proposals? The New York Times says it is under consideration. Details are thin. (Hat tip: Philip Frankenfeld)

4) A dollar of company stock in a 401(k) plan is worth about half that same dollar in a typical mutual fund. Diversify. Please.

When should a choice architect set a default rule? When should a choice architect force a person to choose?

“In a world where everyone is identical, where we’re all homogeneous, where we all want the same savings rate and the same asset allocation, what should I do? Obviously, automatic enrollment. In a world where everyone is highly heterogeneous, I want to force people to choose for themselves. Why? Because if I pick a default people may stay at the default far too long. They may spend their life at that default, always planing to opt-out and never getting around to it. So if Richard’s optimal saving rate is 8 percent and I default him in at 5 percent he may spend 15 years planing to make the change to 8 percent and never getting around to doing it. So defaults can be very dangerous in a world where people are highly heterogeneous and where they are highly prone to procrastinate. And you may want one or the other system depending on how much people procrastinate and how heterogeneous our popular of consumers is. So the key point here is sometimes the best default is no default, is a compulsory decision.”

From behavioral economist David Laibson in his “Psychology of Saving and Investment” lecture. Of course, automatic enrollment in a 401(k) plan as described in Nudge avoids this dilemma by enrolling people without setting a default contribution rate. We’ll have more on default choice decisions from halfway across the globe later this week.

Addendum: The “Richard” in this quote is not Richard Thaler. Just a coincidence.

Two Stanford students rethink the light switch

Peter Russo and Brendan Wypich have found a way to combine the Ambient Orb, the EcoPedal, and the competitive utility bill into one amazing nudge. As second year master’s students in the Stanford Design Program, the two have designed what they are calling a SmartSwitch, which lets people know how much energy they are using, not through colors, but through tactile feedback. It was recently named a semi-finalist in the Greener Gadgets Design Competition. We asked the two to describe their technology in a guest post for the Nudge blog. If you like the idea, you can vote for SmartSwitch here.

Continue reading the post here.

You’re getting $8 more each week from the government. Richard Thaler has some advice on what to do with it.

I think the answer depends on your circumstances. If you are carrying lots of credit card or other forms of debt I say your first priority should be to make progress on that. Call it a private bail-out of the banks if you want. If you are lucky enough to be solvent and you want to spend your money patriotically then I would encourage what might be called “home infrastructure” spending. There are lots of unemployed contractors out there. Get some bids on making your home more energy efficient. It is probably as good a financial investment as you can find these days, and will put some people back to work.

Read other economist’s suggestions at Real Time Economics.

Addendum: For readers who are a bit confused by the headline, $8 refers to the amount of money that will be added to most U.S. workers’ weekly paychecks starting in June, as a result of the recently signed stimulus bill.

The paradox of choice: Japanese edition

Featuring Princeton psychologist Eldar Shafir. YouTube won’t let us embed the post, so you have to watch it here.

Speaking of television spots, Richard Thaler will appear on Good Morning America next week. More information on the hours if it becomes available.

Miss Illinois, a Nudge fan, answers our questions

Miss Illinois Katie Lorenz is a big fan of Nudge. “It makes me think about how I can use my status as a role model to help influence people to make the best decisions possible for them,” she told the Chicago Tribune.

Lorenz, a graduate of the University of Michigan and an MBA student at Loyola University in Chicago, volunteers as a Make-A-Wish Foundation Wish Granter, English as a Second Language tutor, and as a Deputy Registrar for the State of Illinois. She helped raise over $30,000 for the Chicago non-profit Christopher House, and regularly speaks to high school students about the importance of community activism.

She recently participated in the Miss America Pageant, and took some time afterward to answer our questions about her interest in the book, and about beauty pageant heuristics and choice architecture.

Continue reading the post here.