Improving Retirement Savings Through Anchoring

Improving Retirement Savings Through Anchoring

7 July, 2020  •  

Some have argued that there is a “retirement savings crisis” (Munnell, Webb, & Golub-Sass, 2007). Accordingly, a number of approaches have been attempted to increase savings in defined contribution plans, the most common type of retirement savings plan. One approach that has shown promise is using behavioral economics principles to influence savings behaviors. Realizing that we are not purely rational consumers who make sound financial decisions based solely on numbers, behavioral economics focuses on the ways that internal and external factors influence human decisions. However, current approaches have been only moderately successful in increasing savings, with that success coming at a great expense to the employer. There is a need for simple, inexpensive approaches to getting people to save more for retirement. One potential behavioral economics focused approach that has not been attempted is to use the phenomenon of anchoring and adjustment to influence savings decisions. Anchoring refers to the way people make judgments of amount. They anchor on some initial value, an internal or external cue, and then adjust from it. Three experiments explore how anchoring can be used to influence retirement savings decisions. The first shows that the match threshold of a savings plan influences the amount people contribute to their savings. The second shows that, keeping plan attributes constant, the presentation of a high anchor value induces people to save more. The last explores some potentially fruitful uses of anchoring and adjustment theory that can be exploited when using an electronic enrolment form.

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