Why Is It So Hard To Save? U.K. Shows It Doesn't Have To Be
At an outdoor market in London, Garfield Bloomfield, 30, who sells vegetables, offers an amused smile when asked if he's saving for retirement yet.
"My wife is not working at the moment because she decided to go back into studies ... and I got kids to take care of," he says. "I would like to save for the future, obviously, but at the moment I'm just working to get by, really."
Many people in the U.S., of course, feel this way too: I can't afford to save. I have student loans. I just don't make enough money. And these are very real problems. Wages have been stagnant for decades — especially in recent years since the recession.
But if you take someone like Bloomfield and enroll him automatically in a retirement savings plan — he doesn't do anything at all; pretax money just starts coming out of his paycheck — odds are overwhelming that he'll keep saving even though he thinks he can't afford it.
That's exactly what's happening in England. Bloomfield's employer will soon be required to enroll him — unless he opts out — but it hasn't rolled out to all employers. The law is being phased in right now.
"We've still got some way to go, but we've got 5 million people saving," says Charlotte Clark, the top government official for retirement savings in the U.K.
And even though people can opt out if they want, they're not. "We're seeing over 90 percent of people sticking with it," Clark says. "That's 9 out of 10 people are deciding that this is the right thing for them."
She says an even higher percentage of lower-income workers stick with it. It's made very clear to them that if they opt out they're losing free money from their employer, she says.
Tricking The Brain
Here's how it works: Employees start putting just 2 percent of their salary into a retirement account. Employers match a portion of that. And the total with the employer match increases over time to at least 8 percent.
So if millions of people can save money and invest for the future, why are we otherwise so bad at saving? It turns out that saving "is at the nexus of just about every behavioral bias we have," says Kate Glazebrook with the U.K.-based Behavioural Insights Team, a nonprofit that's consulting with the government on the program.
In the U.S., many behavioral economists agree. Brigitte Madrian, a professor at the Harvard Kennedy School, says that often, saving feels like losing if we have to take the money out of our own pocket or checking account and put it into a retirement account. Even though we're just squirreling it away for ourselves, it feels like a loss.
"There's a term in the economics and psychology literature called loss aversion," Madrian says. "The idea is that people experience a loss twice as severely as they experience a gain on the upside."
In other words, our aversion to loss overpowers our desire to gain money by investing, especially since the gain is years down the road.
Automatically enrolling workers into a savings plan and then deducting their pre-tax contribution from their paycheck means workers don't see or feel the loss. It sort of tricks their brains into doing the right thing.
"It takes a task that they want to do but that's hard and makes it easy," Madrian says. "The U.S. government figured this out in the 1950s when it came to income tax collection, that the way to get people to pay their taxes was to do it through payroll deduction."
Unfortunately our instincts also make us bad investors. For example, many people have a strong urge to sell stocks after a 20- or 30-percent market crash. "And that's exactly the wrong reaction," says David Swensen, chief investment officer at Yale University. "Buying high and selling low is not a way to make money."
University of Michigan economist Justin Wolfers explains it this way: "Our minds are programmed to try and find order where there's chaos, to see any way we can make sense of the world around us."
So when we see stocks fall for several days in a row, we see a trend and expect them to keep falling, he says.
Back in our hunter-gatherer days, many of these instincts served us well. We wanted to prioritize the present, so we could live through the day. Looking for patterns helped with that too. "If deer always walked along a particular path, then you know where to go hunting," Wolfers says. "The difference with financial markets is in a financial market, randomness may be the norm, even if in much of the rest of our lives, order and predictability is the norm."
The U.K. Savings Program
For more than half the workers in the U.K. who've been enrolled, their employers have chosen an investment vehicle set up by the government. The nonprofit investment fund was created by Tim Jones, a former bank executive, who has made a point of trying to keep the fees low. He has capped fees at 0.5 percent a year, which, he says, should help workers get a healthy investment return over time.
In his office overlooking the Thames River, Jones says while the program is still rolling out, he expects it to continue to be a success. And there's a precedent: Australia passed a similar law mandating retirement savings plans two decades ago. And now, average everyday Australians altogether have amassed a tremendous amount of money for retirement.
"If you look at the Australian journey for retirement savings plans, that's got to a place where there's between 1 and 2 trillion Aussie dollars in their system," he says. "That just shows you what the power of compound interest can do here."
In the U.S., some employers of their own accord are automatically enrolling workers into retirement plans, and they're seeing similar results: The vast majority of workers stick with it. Behavioral economists and at least a few members of Congress would like to see a law in the U.S. like the one in the U.K.
RENEE MONTAGNE, HOST:
An historic change is taking place in England. A new law requires that from now on, all employers automatically enroll workers in retirement savings plans, or pensions. As part of our series Your Money and Your Life, NPR's Chris Arnold reports.
CHRIS ARNOLD, BYLINE: One day not so long ago, the phone rang on Tim Jones's desk. He's a successful bank executive in London, so he's a pretty busy guy.
TIM JONES: I got a call from a headhunter. And they said, don't hang up, Tim, it's pensions. And I laughed and said, look, I am going to hang up because pensions are very dull. And he said, you won't think so after you've been to see me.
ARNOLD: The headhunter told Jones that the government wanted him to run an investment fund but on a massive scale, an investment fund for the working population of England.
JONES: How often do you get a chance to build something from scratch that will only work if it does a really great job of helping millions of people and hundreds of thousands of employers create a great retirement savings solution?
ARNOLD: So the U.K. had passed this auto enrollment system for all companies. Workers pay into what's basically like a 401(k) plan. But they needed a good low-cost investment fund to handle the money so employers would have a smart, safe way for their workers to invest. This fund - if it worked - was basically going to help an entire nation of people to build wealth.
JONES: I thought, wow, this is going to be hard but a huge amount of fun. I was sold.
ARNOLD: And Jones went on to create the National Employment Savings Trust. It's a nonprofit, now managing investments for millions of workers in the U.K. One reason that Jones said that savings is hard is that a lot of working-class people think that they just can't afford to save. At an outdoor market in London, 30-year-old Garfield Bloomfield is selling vegetables. And he smiles at me like I'm making a joke when I ask him if he's saving for retirement yet.
GARFIELD BLOOMFIELD: I'm not really saving for the future. I would like to save for the future obviously, but at the moment, I'm just working to get by really.
ARNOLD: Psychologists and behavioral economists say that there are all kinds of reasons that people don't start saving for retirement until it's too late. And some of them are very good reasons.
BLOOMFIELD: My wife is not working at the moment because she decided to go back into studies. so I'm not really saving towards the future.
ARNOLD: Because you're just not making enough to have any extra...
BLOOMFIELD: Not making enough, and I've got kids to take care of, so it's like, yeah.
ARNOLD: Of course, in the U.S. wages have been stagnant. A lot of people here, too, feel like they're just scraping by. But here's the thing. If you take someone like Bloomfield and enroll him automatically in a retirement savings plan - that is, he doesn't do anything at all, but money starts coming out of his paycheck - the odds are that he'll keep saving even though right now he thinks he can't afford it. And because of the new law, Bloomfield's employer soon will have to do just that. Charlotte Clark is the top government official for retirement savings in the U.K. She met me at the market here and explained that over the past year or so, a lot of workers have already been enrolled.
CHARLOTTE CLARK: We still got another couple of years to roll out to all employers. So we still got some way to go. But we've got 5 million people saving.
ARNOLD: And this is the kind of amazing thing - right? - that people can opt out if they want. They could say no, no, no, give me all my money, thank you very much. But when you sign people up, you've been finding that they actually stick with it.
CLARK: Yeah, we're seeing over 90 percent of people sticking with it. So that's 9 out of 10 people are deciding that this is the right thing for them.
ARNOLD: And Clark says an even higher percentage of lower income workers stick with it. It's made very clear to them that if they opt out, they're losing free money from their employer. Workers start just by putting in 2 percent of their salary into a retirement account. Employers match a portion of that, and the total with the employer match increases over time to at least 8 percent. Clark said she's especially happy about the lower income workers.
CLARK: Yeah, if we look around, what do we see? You know, people who are working for relatively small businesses - we've got a pork pie shop sign just behind you. I don't think anyone's ever made too much of a fortune kind of selling pork pies.
ARNOLD: But if all goes well, even a pork pie salesman will have a nice nest egg to help with retirement in 20 or 30 years. In the U.S., more companies are starting to auto enroll employees on their own. And at least a few members of Congress are interested in a law like the U.K.'s. Chris Arnold. NPR News, London.
MONTAGNE: And for tips on how to save and invest in a smart way, check out our series Your Money and Your Life at npr.org. Transcript provided by NPR, Copyright NPR.