How behavioural economics is helping workers save more

Next week is #FinancialWellbeingWeek, where we bring together caring employers, industry experts, and leading payroll providers together online to encourage more employers to take action and provide financial wellbeing support.

We caught up with Sarah Holmes Berk , to discuss how her research on financial wellbeing and savings, through the lens of behavioural economics, is increasing savings participation and helping workers feel more in control of their finances.

Get involved in Financial Wellbeing Week: https://financialwellbeingweek.org/

Can you tell us about your journey into behavioural economics and the areas of research you contribute to at Harvard University and the National Bureau of Economic Research?

A decade ago, I was working in the economic studies program at Brookings (a US think tank). My first research project there was on the 6.5 million US state and local government workers who are not covered by Social Security. We found that their exclusion from Social Security was a source of inequity, inequality, and retirement insecurity.

From that moment, I was hooked on studying ways to help individuals to save for the future.

Behavioural economics gives us great insight into individual decision-making and ways to support healthy financial decisions. Over time, my research interests have expanded to include not just retirement security policy, but also short-term (emergency or "rainy day") savings. I'm lucky to work with amazing faculty members and research assistants on various household finance topics.

What first sparked your interest in financial wellbeing?

I grew up in a wonderful family, but one with low levels of financial education and confidence. So I've seen firsthand the stress that money can create, and how difficult it can be for households to make and stick with a plan.

I also know how financial insecurity and anxiety can trickle into every facet of a household's life and lead to poor financial decisions that snowball over time. I got very excited about working in this space after I took a seminar on economic justice in college. I'm really fortunate to work on exciting topics with wonderful partners who are dedicated to improving households' financial wellbeing and resilience.

Can you tell us a bit more about your research into saving behaviours? What benefits does a savings habit have for overall financial wellbeing?

Living paycheck-to-paycheck can be really stressful, so saving has the potential to be very empowering. When a household doesn't have any savings on hand, they worry about how to deal with unexpected expenses. That can create a feeling of being "stuck" in a job, home, or relationship that isn't working any longer, because career and house transitions can be costly. Our research shows that people stick with saving once they start, but that getting them started can be really difficult.

It's useful to make saving simple and unintimidating, but much more powerful to make it the default. Automatic enrollment or "opt-out" savings has a long successful history in the retirement savings context, and now we're applying those lessons to the short-term savings space as well.

Finally, what’s next?

In the US, all eyes are on SECURE 2.0, which was passed into law in 2022. The Act includes several important provisions, including two that will dramatically change the short-term savings landscape. Starting in 2024, employers will be allowed to automatically enrol employees into emergency savings accounts (at up to 3% of pay, for a balance of up to $2,500). Employers will also have the option to allow employees to withdraw up to $1,000 from their retirement account each year for emergencies, without paying the 10% early withdrawal penalty. We are hoping for a chance to evaluate the effects of these provisions in the coming years. And of course, we're excited to continue analysing data from our ongoing payroll savings trials with Wagestream and others.

Sarah Holmes Berk manages a behavioural economics lab that studies financial wellbeing, and has recently worked on Nest Insight's new research into how opt-out savings approaches are boosting the savings of trial participants.

To learn more about how opt-out savings are helping workers put more money aside in an 'emergency fund', take a look at Nest Insight 's latest research, with Wagestream , 美国哈佛大学 , BlackRock?Foundation,?Money and Pensions Service, and the teams at?Bupa?and?Co-op.

https://www.nestinsight.org.uk/powerful-and-popular-opt-out-payroll-savings/