ECONOMISTS are in almost universal agreement that Americans save too little, and several policies have been proposed with the goal of encouraging them to save more.
The Bush administration favors increasing contribution limits on tax-deferred savings accounts like I.R.A.'s. Critics argue that there would be little impact on total savings from such policies, since wealthy households would simply transfer assets from taxable accounts to tax-sheltered accounts.
Leaving aside the behavior of high-income households, responsible members of both parties recognize that providing better incentives to low-income people is the most challenging problem. How can we get this group to save more?
It is possible for low- and middle-income groups to increase savings. After a detailed examination of the financial circumstances of people close to retirement, two economists, Stephen F. Venti of Dartmouth and David A. Wise of Harvard, concluded that the primary reason for differences in retirement assets was differences in propensities to save. It is not unusual to see low-income households with high savings rates holding more financial assets at retirement than high-income households who saved a smaller fraction of their income.
One promising proposal has been to set defaults for enrollment in 401(k) plans so that employees are automatically enrolled in an appropriate plan unless they explicitly choose otherwise. Brigitte C. Madrian, an economist at the University of Pennsylvania, and Dennis F. Shea, from the UnitedHealth Group, have found that this simple policy increases participation rates dramatically.
Another suggestion is to provide matching grants to low-income individuals. Esther Duflo of M.I.T., William G. Gale and Peter Orszag of the Brookings Institution, Jeffrey B. Liebman of Harvard and Emmanuel Saez of the University of California, Berkeley, recently released a working paper examining the design of such a plan. ("Saving Incentives for Low- and Middle-Income Families: Evidence From a Field Experiment With H&R Block"; a nontechnical summary is available at http://www.nber.org/digest/may06/w11680.html.)
In this experiment, about 14,000 low- and middle-income families in the St. Louis area were offered a 20 percent match on their contributions to an I.R.A., a 50 percent match or no match at all. Individuals could make a direct contribution or allocate part of their tax refund to an Express I.R.A. account offered by H&R Block.
Only 3 percent of the individuals who had no match — the control group — contributed to an I.R.A. But 8 percent of those with a 20 percent match rate contributed, and 14 percent of those with a 50 percent match contributed. The amount contributed was four times as much as the control group for the 20 percent match rate and seven times as much for the 50 percent match rate.
These figures exclude the matching funds; they refer only to the individuals' own contributions. Including the matching contributions raises the contribution amounts to 4.5 and 10 times as much, respectively. And most people stuck with their plans: four months after the initial contribution, over 90 percent of the individuals still kept the money in their I.R.A.'s.
These effects are far larger than those of the Saver's Credit, an existing program that provides a tax credit based on the amount of tax-deferred savings. The problem is that a tax credit is useful only if you pay taxes, and many low-income individuals have little or no tax liability after other deductions and credits are applied.
Furthermore, the Saver's Credit is complicated and hard to understand. A matching contribution to a savings program is much easier to comprehend.
The H&R Block Express I.R.A. program shows that savings incentives can work, though the specific H&R Block program was the subject of a lawsuit filed March 15 by the New York attorney general's office. The suit accused H&R Block of fraudulent marketing of the Express I.R.A.'s, contending that the disclosure of fees was inadequate.
The fees were not terribly high ($15 to set up an account, $10 each year for maintenance of accounts under $1,000). But since short-term interest rates have been low for the last couple of years, those who contributed only a few hundred dollars actually lost money since the interest earned could easily be less than the fees.
It may be true that ordinary bank savings accounts are better than I.R.A.'s for individuals who can contribute only a small amount, and one would hope that such individuals would be given appropriate recommendations.
But for those who can contribute more, I.R.A.'s can be a very attractive savings vehicle, particularly if coupled with the strong incentives provided by a matching grant program.
As the authors put it, "Taken together, our results suggest that the combination of a clear and understandable match for saving, easily accessible savings vehicles, the opportunity to use part of an income tax refund to save, and professional assistance could generate a significant increase in contributions to retirement accounts, including among middle- and low-income households."
Matching grants also have a long and venerable history as an American institution. They were invented by none other than Benjamin Franklin in conjunction with his fund-raising efforts for the Pennsylvania Hospital, the first public hospital in America, established in 1751.
Franklin persuaded the legislature to participate by indicating that it would receive "the credit of being charitable without the expense" and explained to the donors that "every man's contribution would be doubled." No doubt the sage of Philadelphia would heartily approve of his innovation being used to encourage the virtue of thrift.