Figuring Out Why You Save or Don't Save

By ANDREW CASSEL

THIS seems to be savings week in these pages, which is not a bad thing. Given how fuzzy many people remain about the need for savings - for themselves as well as for the nation as a whole - it's worth all the attention we can give it.

As it turns out, a good deal more attention is being paid to savings these days. Researchers from the fields of psychology and sociology, as well as economics, are increasingly gravitating to the newly emerging discipline called "behavioral finance," which seeks to find the human element in money matters.

You may feel all alone in those moments when you're contemplating your 401(k) statement or wondering how you'll ever get by once they give you that gold watch. In fact, a small army of scholars is metaphorically looking over your shoulder, trying to figure out what makes you decide to save - or not.

If that sounds like belaboring the obvious, you should have heard Gary Selnow, a professor of communications at San Francisco State University who led off a conference of savings behaviorists this week at the Wharton School.

"Investing for retirement is different from just about anything else people are asked to do," Selnow said. "On nearly every dimension, tucking away money today for a more secure tomorrow violates basic human inclinations."

In the best of times, the reward for being a diligent saver is years or decades away, Selnow noted. And as we now know, there is no ironclad certainty that what you save will even be there when you need it.

What is certain is that putting money away means you can't spend it today. In other words, Selnow said, you're giving up a definite reward in the present for an indefinite reward in the future - not something that humans are programmed to do easily.

Plus, there are no immediate penalties for procrastination. As hard as it can be to start dieting or quit smoking, people who do that at least get some fairly quick reinforcement in the form of better health or looks. Starting to save today will, at best, leave you feeling vaguely virtuous.

It's plainly not enough to motivate many people. Although the amount of money in personal or workplace retirement accounts has soared in the last two decades, participation rates in 401(k)'s or other workplace savings plans has remained low.

Fully half of American workers have made "negligible" contributions to their retirement plans, while an estimated 15 percent have saved nothing at all, Selnow said, quoting a 2002 survey.

What will it take to improve that? A better economy with more jobs and higher incomes might help - but then again it might not. Personal savings rates fell in the booming 1990s; millions of Americans evidently thought soaring stock prices meant they needed to put less away.

Another option is to tinker with the rules of workplace savings plans. Several at the Wharton conference argued that people tend to find these plans dauntingly complex and would respond better to a system that essentially gave them fewer choices.

For instance, Sheena Iyengar of Columbia University cited experiments that found consumers were more likely to purchase jam or chocolate if they were offered fewer varieties to pick from.

Sure enough, when she analyzed the behavior of nearly 900,000 workers in 647 retirement plans, the same thing held true: The more mutual funds or other investment choices workers in a retirement plan were offered, the lower the proportion of workers who participated in the plan.

Only in the last few years have the tools been available for this kind of research. Olivia Mitchell, head of Wharton's Pension Research Council, likened it to the boom in consumer tracking that followed the advent of bar-code scanning.

"Looking at consumer decision-making has become completely revolutionized in the last five years," she said. It's none too soon to bring that revolution to the issue of retirement savings.

This article as posted on Philly.com