Veritas propter investigationem [Truth through research]
TitleWhen a Nudge Isn’t Enough: Defaults and Saving Among Low-Income Tax Filers (2011)
AuthorsErin Bronchetti
 Thomas Dee
 David Huffman
 Ellen Magenheim
InstitutionNational Bureau of Economic Research
TopicsBehavioural economics
 Saving issues
CountryUnited States
Date Published2011
Date posted on PR12 Aug 2014
Bronchetti, E Dee, T Huffman, D Magenheim, E, (2011). When a Nudge Isn’t Enough: Defaults and Saving Among Low-Income Tax Filers (2011) National Bureau of Economic Research,

PensionReforms’ summary and comments

‘Behavioural economics’ suggests that the way a proposal is framed can ‘guide’ savers into making more appropriate decisions about saving and investing than if left to their own devices.  See here and here for examples from the retirement saving environment.  Some recent public policy initiatives are based on similar principles – see here from the UK and here from New Zealand.


This 2011 report from the United States looks at low-income earners and their propensity to put part of their tax refunds into a retirement savings account.  The report suggests it is “…one of the few to investigate how defaults affect savings behavior, outside of the particular setting of decisions about 401(k) contributions.”


The US tax authority (IRS) gave 2010 tax-filers the opportunity to use part or all of their tax refunds to buy a “low-risk, relatively liquid U.S. Series I Savings Bond” that presented a default option as an opt-out choice.  The report looked at tax-filers in the Philadelphia region.


It didn’t work.  In a subsequent follow-up, “79 percent of preparers observed that filers seemed to resist the savings default due to strong prior plans to use the refund for consumption.” And 75% of the filers themselves “…had the expectation that they would spend the refund.”


Previously held expectations seemed to trump the default setting.


“In fact, default interventions are argued to work partly because they establish a particular status quo, and thus harness status quo bias...However, pre-existing plans would tend to create a competing status quo, which could undermine the power of the default manipulation.”


So how does this tie in with previous studies on 401(k) saving schemes?


“In short, a nudge is not a shove.  Indeed, 401(k) defaults may be powerful precisely because they coincide with the pre-existing intentions to save of relatively affluent individuals.  Previous studies argue that 401(k) holders want to save for retirement, but have trouble actually initiating savings contributions, due to uncertainty about the optimal contribution, the decision costs associated with figuring this out, and the tendency to procrastinate…The default can thus improve welfare, by providing an implicit recommendation, and lowering the decision costs of choosing a specific savings contribution rate, while moving behavior in a direction that is consistent with previous intentions.”


The report’s findings suggest that low-income earners are not more susceptible to ‘nudges’:

“To the extent that low-income filers do not have strong intentions to save at tax time, defaults may have little effect. One implication is that default interventions aimed at low-income populations might need to be augmented with ex ante efforts to shift expectations.”


In a different study, although 75% of tax filers said they would be interested in saving part of their refunds, only 6% actually did something about it.


“The fact that we find no discernible effect of the default manipulation raises questions about the power of defaults for different populations and the mechanisms underlying default effects…In summary, our findings raise important questions about the applicability, and optimal design, of default interventions for policy measures.”


PensionReforms thinks that the principles underpinning behavioural economics may have a role in helping to explain why people do things and could help to inform relationships between employees and employers and between financial service providers and customers.  However, they should be kept away from influencing public policy initiatives.  When regulators get involved, this report illustrates there is much more to the saving/spending decision than access to cash.  (File size 2.8 MB; 48 pp) 692