By Kelli Garcia and Amanda Kaplan

December 5, 2022

Savings help families secure a comfortable retirement, weather financial emergencies, make major purchases, and decrease stress. Unfortunately, nearly 57 million workers in the U.S. do not have access to an employer-based retirement plan, including over 63% of Hispanic workers, 53% of Black workers, 45% of Asian American workers, and 41% of white workers. Even workers with access to a retirement plan might not use one: over 20% of full-time workers and about 60% of part-time workers that have access to a retirement account don’t participate. 

What’s worse, those with access who choose to participate might still not have sufficient savings by the time they retire: over 22% of retirement contributions made by people 50 or younger are withdrawn from accounts each year. People often withdraw retirement funds early to address immediate needs, particularly when they don’t have short-term savings. A recent study found that 45% of households couldn’t pay an unexpected $400 expense without dipping into their retirement accounts; this number jumps to 65.2% for Black households, compared to only 46.7% for white households

To build savings and promote financial equity, families must have access to a retirement account, choose to save, and limit their pre-retirement withdrawals. Congressional action is needed to ensure that all workers have access to retirement accounts. Additionally, policymakers should leverage the principles of behavioral science included below so that more families with the ability to save choose to do so and reduce their pre-retirement withdrawals.

1. Automaticity and Defaults Increase Participation in Savings

For various behavioral reasons, saving money is difficult for people of all socioeconomic statuses. We, as humans, have limited cognitive energy yet face thousands of choices every day; to get by, our brains minimize active effort and utilize heuristics and other cognitive shortcuts wherever it can. Therefore, we might put off actions we know we should do because they are tedious or overwhelming. We are more likely to engage in behaviors that are easy and simple. Automatic processes eliminate the required effort and make engagement easy. For example, automatic enrollment and automatic escalation policies have tripled participation in savings programs and nearly quadrupled dollars saved. Similarly, default options reduce effort by offering pre-set options that take effect unless the user elects otherwise. Defaults can eliminate the need to take action at all or can serve as powerful references to ease decision-making. Default contribution rates, when set appropriately, can significantly increase dollars saved. An effective savings program should automatically enroll new employees, default employees into a contribution plan, and automatically escalate contributions to a set maximum in order to increase savings.

2. Financial Incentives Can Motivate Pro-Saving Behavior

Financial rewards, even small micro-incentives, can have outsized impacts on behavior. Small payments can signal the importance of an action, make the future benefits of an action more concrete today, or incentivize behavior in cases of true uncertainty. Financial incentives – like tax credits or micro-payments – have been shown to increase retirement savings. Financial incentives can also serve as rewards that encourage certain behaviors repeatedly; over time, the behavior might become a habit, leading to long-term pro-saving behavior. As much as possible, Congress should provide financial incentives that motivate employers to offer retirement plans to their employees and encourage employees to save.

3. Trusting People Promotes Self-Efficacy while Saving

People need to feel empowered to make their own choices. When people feel forced or coerced, they may avoid engaging in certain behaviors, even behaviors in their best interest. For example, messaging to eat healthier or stop smoking can have opposite effects on behavior if framed in ways that threaten people’s perceived autonomy. For savings, Congress must promote self-efficacy so people feel they can save on their own terms. This includes trusting people to make their own financial decisions, providing people with the option to opt out of any program feature they don’t like, and allowing people to make tax-free emergency withdrawals from their retirement account if they deem it necessary.

An Ideal Congressional Solution

Ideally, Congress would create a national savings program that provides all workers with a retirement plan if their employer does not offer one. This program should cover both traditional as well as nontraditional workers – including contract, gig, and independent workers – who are disproportionately people of color and/or people with low incomes. Workers should also have the ability to build rainy day funds to more permanently address immediate needs when they arise, rather than being forced to make costly pre-retirement withdrawals. The MarylandSaves program offers one potential model for a solution. This program provides state-sponsored retirement plans to any uncovered worker, as well as emergency savings accounts. The worker’s payroll deductions first fill their emergency savings account up to $1,000 and then go towards their 401(k). Tax-free withdrawals can easily be made from their emergency account for immediate expenses. Additional contributions replenish the emergency account first (if applicable) before adding to their 401(k). Regardless of the specifics, an ideal Congressional solution would provide all workers with access to a retirement account and a vehicle to build emergency savings.

The Path Forward

Currently, in Congress, there are two bipartisan savings bills that begin to tackle these issues. In March 2022, the House passed the Securing a Strong Retirement Act of 2022, and in June 2022, the Senate Finance Committee unanimously approved the Enhancing American Retirement Now (EARN) Act, clearing it for a full Senate vote. To learn more about what these bills do, and which specific provisions from each incorporate the behavioral science principles mentioned above, read our policy brief here. In addition to highlighting which provisions from each bill should be included in a final savings bill passed by Congress, we also include other actions Congress can take to help families build savings.