Tuesday, January 30, 2018

The general equilibrium with nudges

Development is hard! Apparently simple solutions most often end up with unintended consequences which detract from the solution's gains.

Default auto-enrolment into savings plan has been hailed as a major progress in influencing people's savings habits. But a new study has contrarian findings,
Automatic enrollment has pushed millions of people who weren’t previously saving for retirement into 401(k)-style plans. But many of these workers appear to be offsetting those savings over the long term by taking on more auto and mortgage debt than they otherwise would have.
The findings,
The study looked at the savings and debt levels of 32,073 civilian employees the U.S. Army hired in the 12 months before Aug. 1, 2010, when the federal government adopted automatic enrollment in its $537 billion Thrift Savings Plan... After adjusting for differences in the economic cycle and in characteristics of the two employee groups, including education and salary levels, the study found that four years after hire, the employees who were auto-enrolled amassed an average of $3,237 more in 401(k) contributions than those who were left to sign up on their own. (That number includes both employee and employer contributions, but not market growth.) But the auto-enrolled employees also had an average of $1,563 more in consumer and auto debt than those who were hired before auto-enrollment. When mortgage debt is factored in, the picture becomes more complicated. The auto-enrolled employees owed $4,131 more, on average, on their homes than their colleagues who were hired before auto-enrollment. This debt more than offsets the extra $3,237 the auto-enrolled employees contributed to the plan, including the employer match.
As the article points out, the takeaway appears to be that auto-enrolment does not make you save more overall but it helps you put away a nest egg to buy a home, which in turn can contribute to a higher net worth over time.  

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