This document proposes a "Checking Savings Program" to help increase the personal savings rate in the US. It would automatically transfer a percentage of deposits from checking accounts into linked savings accounts, with the transfer percentage gradually increasing over time from 2% to 10% over two years. This would leverage defaults and automatic enrollment to overcome behavioral biases that contribute to undersaving, like loss aversion and procrastination. Rewards would incentivize participation and penalties would discourage early withdrawals. By making saving the default option and easing people into it gradually, this program aims to significantly boost personal savings without requiring changes to individual saving habits.

1. Checking Savings
By Mitchell Chubinsky

2. Analytical Framework
Checking Savings
Background
The Checking Savings Program
Conclusion
Notes and Sources

3. Background
Recent Trends in the U.S. Personal Saving Rate
0.00%
1.50%
3.00%
4.50%
6.00%
7.50%
9.00%
Jan-00 May-01 Sep-02 Jan-04 May-05 Sep-06 Jan-08 May-09 Sep-10
Source: U.S. Department of Commerce: Bureau of Economic Analysis via the St. Louis Fed
Personal Saving as a Percentage of Disposable Income

4. • Although the U.S. Personal Saving Rate has surged in the
past few years from alarming lows, it needs to climb even
higher.
• In these tumultuous economic times, saving early and
often is more important than ever:
• Volatile equity, fixed-income and commodity markets.
• Continued decline of private pension schemes.
• Massive deficits in public pension plans and Social Security.
• Personal saving is the only way to hedge these risks and
an uncertain future.
The Current Environment

5. • It’s clear that individuals should save more; studies
have found that many households even feel the
same way.
• In many respects, low personal savings is less the
consequence of economic factors than behavioral
ones.
• The problem, then, is how can we change people’s
savings habits?
• A wide body of research has found behavior to be
notoriously stubborn; maybe we can’t change it.
Raising the Rate – The Problem

6. But maybe we don’t have to
change savings habits…

7. • Instead of trying to influence consumers’ active
savings habits, have banks enroll customers in
checking accounts that will automatically transfer a
percentage of deposits into linked savings accounts.
• Could be pure savings accounts, CDs, govt/agency debt or
other risk-free investments.
• The deposit transfer percentage would increase 1%
quarterly from 2% to 10% (or higher) over two years,
driving a comparable rise in the personal saving rate.
The Solution – Checking Savings

8. • This account type would be the default for new accounts,
but customers would be free to opt-out at any time.
• A rewards program would offer a variety of bonuses for
maintaining balances and reaching savings targets:
• Higher interest rates, frequent flyer miles, iTunes downloads,
etc.
• Penalties would be imposed for early and frequent
withdrawals not for emergency needs or other qualified
expenses.
• Housing, educational, medical, etc.
Other Features
The Checking Savings Program

9. • Economics predicts that individuals will save a portion
of their income while employed to finance a healthy
level of consumption after retirement.
• People realize that they should save more but have
trouble doing so for various behavioral reasons.
The Main Idea
Analytical Framework

10. • Bounded Rationality – No one knows for sure what the
appropriate savings rate is. The different options and
instruments can be overwhelming and confusing.
• Those without economics training may not fully appreciate
the time value of money or the fundamental tradeoff
between present and future consumption.
• Hyperbolic Discounting – People tend to irrationally
discount the future, overconsuming and undersaving in
the present.
• Also explains procrastination – I’ll start saving more…
tomorrow, when I get a raise, etc.
Behavioral Economic
Explanations for Undersaving

11. • Loss Aversion – People tend to weigh losses far more
heavily than equivalent gains. Increased savings can be
perceived as a loss of disposable income and current
consumption, but it’s really just an intertemporal tradeoff.
• Amplified by hyperbolic discounting – The benefits of saving
for a vague and distant future are severely undervalued,
given the cut to spending money that you have to live with
now.
• Status Quo Bias – There is a strong tendency towards
inertia. People infrequently change habits and behaviors,
even when it may be in their best interest to do so.
Behavioral Economic
Explanations for Undersaving

12. • Using predetermined deposit transfer rates and
investments absolves consumers from having to
make the potentially confusing decisions of how and
how much to save.
• Also ensures people will save enough, regardless of
behavioral biases and irrationally present-minded
preferences.
• With enrollment by default and automatic savings
transfers, procrastination becomes irrelevant and
saving becomes the new status quo.
• Discontinuing participation in the plan would require an
active opt-out, which few would pursue.
Why Checking Savings Will Work
Analytical Framework

13. • Having a preset transfer rate that gradually increases over
time from 2% will help ease people into saving by
mitigating the loss aversion.
• Starting at 10% would feel like a huge loss, whereas 2%
would be negligible for many.
• Rewards will incentivize and reinforce savings behavior.
Offering a variety of bonuses would make the program fun
and help expand its appeal across demographics.
• Penalties will serve to force participants to think carefully
about withdrawals, and in doing so encourage fiscal
responsibility.
Why Checking Savings Will Work

14. • Personal Saving Rate. Last Updated 11/1/2010.
• http://research.stlouisfed.org/fred2/data/PSAVERT.txt
• This program draws heavily on the ideas and body of research
discussed in Richard Thaler and Shlomo Benartzi’s 2004 Journal of
Political Economy article “Save More Tomorrow: Using Behavioral
Economics to Increase Employee Saving.”
• Thaler, Richard H. and Benartzi, Shlomo. “Save More Tomorrow: Using
Behavioral Economics to Increase Employee Saving.” Journal of Political
Economy. 2004, vol. 112, no. 1, pt. 2.
Notes and Sources