Using Financial Innovation to Support Savers: From Coercion to Excitement
Executive Summary — This paper acknowledges the wide range of solutions to the problem of low family savings. Families, and of particular interest to the authors, low-income families, save for a wide variety of purposes, including identifiable reasons such as education and retirement and others that are more broad, like rainy days or emergencies. Given societal pressures to consume, and given the diversity among people, it is unlikely that there is a single solution to the savings problem. Yet a number of programs described by Tufano and Schneider have great promise in supporting household savings. Tufano and Schneider discuss each program from the perspectives of would-be savers as well as from that of other key stakeholders. Key concepts include:
- Researchers must be sensitive to the needs of low- and moderate-income families, whose concerns about having the resources to cope with short-term emergencies are just as legitimate as needs to plan for a retirement that may be decades away.
- The continuum of solutions highlighted in this paper ranges from those that force families to save (coercion) to others that seek to work consumers into a frenzy about savings (excitement). These varied solutions emphasize different elements of human behavior or impediments to savings.
- Some solutions to low savings require massive government policy, some require small changes in existing regulations, and still others are completely market oriented. Some require large subsidies, while others might be profitable on their own.
We review a wide variety of programs that support savings by families, in particular by low- and moderate-income families. These programs range from ones that literally compel families to save, to those that make it hard not to save, make it easier to save, provide financial incentives to induce savings, leverage social networks to support savers, and finally, to programs that excite people to saving. These programs involve a number of different stakeholders, including governmental entities, social intermediaries, non-profit organizations, and for-profit firms including financial institutions. They embody a number of different assumptions about incentives, drawing from economics, psychology, and sociology. We describe examples of each program and provide some information on their economics and effectiveness. Our goal is not to identify the "best" program, but rather to lay out the range of innovations to meet the needs of heterogeneous potential savers.