The Path Forward to Increase Retirement Savings in Mexico

A recent report by the World Economic Forum estimated that by 2050 the retirement savings gap may reach $400 trillion, leaving hundreds of millions of people at risk of poverty in old age. This problem is particularly acute in Mexico and across Latin America. Aging populations, low mandatory contribution rates, and large numbers of informal sector workers (who do not have contributions withdrawn from their paychecks) combine to leave most workers starkly underprepared and many without any formal retirement savings at all. In Mexico, it’s estimated that even workers making the mandatory minimum contributions would need to save an additional 7% of their income to be adequately prepared for retirement. The 60% of Mexicans who work in the informal sector and do not make these mandatory minimum contributions are left even more vulnerable.

Increasing voluntary retirement savings is one approach to narrow the gap. Currently less than 0.5% of the nearly 40.5 million registered account holders in Mexico make even one contribution a year, despite efforts to increase accessibility and educate people about the importance of saving.

A behavioral approach

In 2015, ideas42 began a partnership with MetLife Foundation, in collaboration with the Mexican government regulatory commission CONSAR and private retirement fund administrators known as Afores, to tackle the problem from a behavioral perspective: exploring new ways to narrow the savings gap by encouraging voluntary retirement savings. We identified four important behavioral barriers and six design principles to combat them.

In the years since, we’ve worked with our partners in Mexico to design and implement solutions employing these six principles, testing over 30 unique designs, as well as many different combinations of these interventions. The lessons emerging from this work are summarized in our final report: Using Behavioral Science to Increase Retirement Savings in Mexico: A look at what we have learned over three years. Here’s a sample of what we’ve learned:

  • Capturing attention is the critical first step. We redesigned the envelopes used to mail account statements and sent text messages to draw attention to retirement savings, increasing the likelihood that the statements were opened and read. We learned that messaging matters: some of these messages had a significant impact on engagement and contribution rates, while others did not. Moreover, with a single, isolated intervention, most recipients still did not engage. No one technique or channel, no matter how well designed, can alone solve the problem – the “trick” is to communicate clearly, across multiple channels, and perhaps more often than might seem necessary to capture and maintain attention, keeping savings top of mind.
  • Once you have people’s attention, offering clear feedback on how they’re doing can make the path forward easier to follow. We redesigned retirement account statements to use a visual savings thermometer to signal the “health” of recipients’ retirement account in a more concrete way than simply showing the account balance. Along with other changes to the redesigned statement such as personalized savings tips, this led to a 40% increase in the number of account holders making contributions.
  • Even those who intend to save more may not follow through, and behavioral interventions can help bridge the final step and motivate action. Empathizing with our future selves can help make it easier to overcome the temptation to put off saving. We designed an exercise allowing account holders to “meet” their future selves, applying an aging photo filter to a selfie through a smartphone app, to make their needs in retirement feel vivid. The result was a 13% increase in the number of account holders making contributions.

The path forward: moving beyond voluntary contributions

We’ve learned a lot from this collaboration about techniques that, when combined and scaled across the millions of retirement account holders in Mexico, have great potential to meaningfully increase retirement savings. Despite these successes, our work in Mexico has also underscored the need for more comprehensive solutions that have proven effective in other contexts, such automatic enrollment into retirement savings at a higher default rate and gradual increases in contribution amounts as income grows. To ensure that the 60% of Mexicans who work in the informal sector aren’t left behind, it’s also critical to create a more inclusive system with alternative paths for enrollment and contribution. Doing so will require collaboration among policymakers and industry stakeholders to continue to develop, test, and scale new solutions for the populations that are hardest to reach, but also most vulnerable.

What, Exactly, Are We Saving for?

Saving money, even in small amounts, has countless benefits. It helps low-income households build financial resilience—the ability to manage unforeseen expenses and avoid crises. However, saving is challenging for everyone—even when we intend to save more, human tendencies such as present bias, depletions in self-control, and limited attention tend to get in the way of our good intentions. It’s even harder when we don’t know exactly what we’re saving for, and when we don’t have access to formal savings channels like savings accounts.

It’s common for people whose needs for financial services aren’t met to create their own informal methods of saving money. Most clients of CAME, a large microfinance institution in Mexico, keep money socked away at home or participate in informal community-based savings groups by pooling their savings with family and friends, due to limited access to formal savings products. While these informal savings methods are less secure than keeping money at a bank, they allow easy access to funds in case of sudden financial emergencies. But they’re still subject to the same behavioral barriers to saving successfully. That’s why CAME decided to broaden its efforts to reach more clients—from offering microloans to launching a new savings product that helps its clients save more without the risk that comes with saving informally.

CAME clients are predominantly female small business owners whose average income hovers close to the poverty line. Knowing that saving money is difficult for all of us, and drawing upon evidence that living in poverty can exacerbate present bias and limit psychological resources such as self-control and attention, we partnered with CAME to develop a behavioral intervention with the aim of fostering savings among their clients.

A good, evidence-based behavioral solution for bridging a savings intention-action gap is making savings automatic, but what can be done when that’s not an option? Building on insights from previous studies, we designed a goal-setting exercise to be facilitated by CAME staff dedicated to working directly with clients. These savings promotores are responsible for increasing clients’ awareness of their potential future needs and suggesting the appropriate savings products to help manage their financial lives. In our intervention, clients choose both a goal to save toward, and an amount they will put toward making it happen. After opening a savings account, clients then receive a savings card with an image reminding them of their goal and the voluntary deposit amount they chose to commit to. Next to the deposit amount, there is a space for their signature, in order to create a sense of commitment. Additionally, clients can earn small prizes for accumulating deposits, and they will receive follow-up text messages to keep their goals top of mind over time.

We chose goal-setting for our intervention because it has proven an effective solution for building financial resilience in several different contexts. All of the aspects of our design draw from existing evidence: results from prior ideas42 work in the Philippines show that going through an exercise of stating concrete savings aspirations can help people save more by driving their attention and effort toward achieving their goals rather than nebulous savings. Research across different countries also demonstrates that reminders can help people avoid procrastination and follow through on their savings goals over time. Finally, rigorous evidence also suggests that creating a sense of commitment within individuals to achieve their savings goals imposes an emotional price of not pursuing them, which encourages people to choose to save.

Even with such an intervention in place, the reality of saving is still quite difficult. However, early results from our pilot with CAME clients are showing positive impact. It is clear from talking to clients that our intervention has kept their savings goals top of mind. One CAME client, with a look of hopefulness on her face, told our team that she started saving in April in order to be able to provide a Christmas Eve dinner for her children and grandchildren this year. Another client mentioned that he is saving to buy new tools for his carpentry business. While he applied for a loan to invest in his business, he sees his CAME savings account as a good alternative that will enable him to rely less on credit. Moreover, clients shared that they enjoy receiving the personalized reminder text messages. In addition to reminding them of their goals, they report that the messages make them feel special and build on their sense of trust in CAME.

Another interesting insight from our conversations with clients is how much they have come to actually value the restriction the savings accounts impose on their financial habits. Once it is deposited, the CAME accounts don’t allow clients to withdraw money for a fixed period of time, which helps them to avoid the temptation of making purchases in the moment or covering day-to-day expenses.

We’re encouraged by the initial positive feedback we’ve been collecting from CAME clients in this pilot test of our goal-setting intervention. Over the next weeks, we’ll be analyzing how the intervention affects savings behavior. Stay tuned for results that will inform the impact behavioral interventions can have in boosting savings among micro-loan holders and help households manage their complex financial lives and increase their financial resilience and security.

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