Every day, approximately 10,000 Baby Boomers reach retirement age. This means that with every sentence of this article you read, approximately one baby boomer is retiring. Unfortunately, the evidence suggests that many Boomers haven’t saved nearly enough to actually retire. The numbers are stark: according to the National Institute on Retirement Security, the median U.S. household near retirement has saved $12,000. If you and your spouse did nothing else except share a Starbucks cappuccino every morning, the money would still not last throughout retirement.
It doesn’t take a lot of imagination to see how this saving shortfall might become a social crisis. What will happen when millions of older Americans realize their bank accounts are empty? Can the Federal government afford to support such a large percentage of the population, especially if we hit another recession?
The obvious way to prevent this retirement savings crisis is to get Americans to increase their savings rate. While policymakers and employers have tried all sorts of remedies in recent decades, from tax incentives to save to financial education campaigns, I believe an easier solution is available. And the solution fits in your pocket.
One of the big lessons of behavioral economics is that even modest tweaks to the retirement savings process can lead to dramatic shifts in saving behavior. For instance, along with Professor Richard Thaler of the University of Chicago, I developed the Save More Tomorrow program, a plan in which consumers are able to commit in the present to a future savings rate increase. This has led to huge improvements in savings, already doubling the saving rates of more than four million Americans. Other studies show that simplifying or even automating the enrollment process, thus allowing people to skip most of the paperwork and overwhelming decisions, can lead to participation rates in excess of 90 percent.
Such interventions are not enough. If we are really serious about improving the savings rates of Americans, then we also need to make saving easier for the 78 million Americans who do not have access to 401(k) plans. While economists traditionally assumed that humans are rational agents, and those interested in savings will find the time and energy to open individual retirement accounts (IRAs) on their own, behavioral economists have consistently documented our mental shortcomings. It's not that people don't want to save; that's a widely shared goal. Rather, it's that even modest requirements of effort - such as having to fill out our address, or choosing a financial institution for our IRA account - can dissuade us from this goal.
However, technology can help. We should create a retirement savings app on our smartphones. This app would be the ultimate labor-saving tool. Because the phone company already knows your name, birth date, social security number and address, the forms could be filled out automatically; it shouldn’t take more than one click to register. And then, once an account is established, consumers could automatically send their desired amount to their retirement savings account every month. The charges would later appear on their phone bill, just like a text message donation to charity.
This might sound like a radical idea, but developing countries have consistently demonstrated that phone banking can be safe, effective and extremely popular.
Consider Kenya. For decades, a lack of access and high fees on small accounts kept most Kenyans “unbanked.” This stunted commerce and savings, and encouraged theft and corruption. But then Vodaphone started a commercial bank-by-phone system. Now 70 percent of Kenyan adults use it to transfer money, make payments and save.
There is no reason developed countries can’t use a similar strategy. We use our smartphones for all sorts of activities, from online shopping to Facebook. Why not add saving for retirement to the list? We shouldn’t be lagging the developing world.
But this app wouldn’t just increase the convenience of saving. It would also take advantage of another mental weakness that has, for too long, kept us from investing in the future: impulsivity. Normally, our lack of self-control leads us to accumulate debt. Instead of putting money into our 401(k) or IRA, we give in to the temptation of immediate gratification and charge items on our credit card.
However, this savings app would allow people to be impulsively responsible. Whenever we’re feeling flush, we could donate $5, $50 or $500 towards our retirement account. Didn’t buy a new sweater? Skipped the latte today? You can now put that same amount of money in your savings portfolio. For the first time ever, it will be as easy to save money as it is to spend money.
There is one last virtue of this app: it will be a gold mine for researchers like myself. For the first time, scientists will be able to test various digital nudges that make people more responsible. (Companies are constantly experimenting with designs, cues and layouts that encourage you to spend; our experiments will look for ways to help you save.) And these new techniques won’t just be relevant for retirement accounts. One of the most pressing questions in the social sciences is how to get people to plan more effectively for the future. This is crucial for retirement savings, of course, but also for issues like the obesity epidemic, global warming and even the national debt. Time and time again, we overvalue today at the expense of tomorrow.
Mobile technology has transformed so many facets of modern life. If done properly, I believe these devices can also transform the way we plan for the future.