Saving Incentives for Low and Middle Income Families: Evidence From a Field Experiment with H&R BlockPDF version
A significant share of low- and middle-income American families are thought to have inadequate savings for retirement. Families with income below $40,000 typically have low rates of coverage under employer-provided pensions, and tax deductions and other incentives often do not provide much incentive to contribute to Individual Retirement Arrangements (IRAs) because these households pay relatively little in taxes. Elderly poverty has fallen from 35 percent to 10 percent since the inception of Social Security, but individual savings plans, not Social Security, are now the main source of retirement savings. Insufficient savings can reduce elderly households’ ability to cope with financial shocks.1
An alternative to tax benefits, government incentives such as savings matching may offer a more promising way to bolster savings among low- and middle-income households. Matching, where a percentage of savings is matched by the government in the form of additional deposits, is independent of an individual’s tax rate, and thus may provide an incentive for saving even for people in lower tax brackets. The Saver’s Credit, a federal program offering a tax reduction of up to 50 percent of funds contributed to a 401(k) or an IRA, offers one example of a matching program. Other matching contributions are present in many employer-sponsored 401(k) plans, but none of these programs have significant take-up. Matching programs seem to offer significant encouragement and benefits to families who desperately need to save for retirement, but the willingness of families to contribute to retirement has remained low even in the presence of these programs.
The field experiment was conducted in conjunction with H&R Block, the largest tax preparer in the country. H&R Block offers its clients the option to split their tax refund between their IRA accounts and money for immediate use. Clients who engaged with this program in 60 H&R Block locations in Missouri and Illinois from March 5th to April 5th, 2005, constituted the sample for this intervention study.
Each client electronically prepared their tax return and was randomly assigned one of three match rates for their IRA contributions. When a client was deciding how much to contribute to their IRA, they were told a (randomly chosen) rate at which their contributions would be matched, potentially influencing their contribution amount. One third received a 20 percent match rate, another third received a 50 percent match rate and the rest received a match rate of 0 percent, functioning as a comparison group. Individuals could receive up to $1,000 in matched funds.
Impact on Retirement Contributions: Higher matching rates significantly increased IRA participation and contributions. Take-up rates were 3 percent, 10 percent, and 17 percent, respectively, for the comparison group, the 20 percent match group and the 50 percent match group. Conditional on take up, average contribution levels excluding the match funds were $860, $1,280, and $1,310, respectively. Including the matching contributions, average IRA deposits with the 20 percent and 50 percent matches were 5 and 11 times higher than with no matching.
The effects were particularly large for married tax filers and were substantially larger than those found in the context of government and employer-sponsored 401(k) matches. The combination of financial incentives, tax preparer assistance and the opportunity to use part of an income tax refund to save could generate increases in both the efficacy of federal tax incentives and the willingness of households to contribute to retirement savings accounts.
1 National Bureau of Economic Research (NBER), “Social Security and Elderly Poverty,” http://www.nber.org/aginghealth/summer04/w10466.html.
