The Refund to Savings Initiative
The Refund to Savings Initiative: Can tax-time be the catalyst that saves our national savings rate?
As has been frequently noted, Americans are poor savers and we have been getting worse over time. Our low savings rate and tendency to prioritize spending in the present over spending in the future makes us vulnerable to financial crises. Recent research reveals that 47% of Americans report they couldn't raise $2,000 within 30 days for an emergency expense, such as a major car repair or medical bill (or just paying the rent in the event of a job loss).
However, amidst all of the dreary statistics on our lack of savings shines one very encouraging number: the average IRS tax refund was nearly $3,000 in 2008. This represents more than a month's take-home pay for the median income earner. So the question for the pro-savings crowd is: How do we turn this annual windfall into a savings opportunity to boost financial security all year long (and maybe for future years too, through long-term education and retirement savings)?
Researchers at the University of North Carolina, led by Michal Grinstein-Weiss, and Duke University, led by behavioral economist Dan Ariely, have teamed up with Intuit Corporation, makers of TurboTax, to answer this question. The team is using principles of behavioral economics to design and test savings prompts and incentives that will be embedded into TurboTax's online tax preparation software. The prompts are simple and provide both non-financial and financial incentives, such as priming participants to think about a specific savings goal (e.g. a home renovation project or a child's education) just before asking if they would be interested in saving any part of their refund if given an easy way to do it. An example of a financial incentive prompt is asking if they would be willing to direct a portion of their refund to a savings account during the filing process if offered a match on the money.
The study centers on three primary questions:
- What are the best ways to persuade people to save their refunds?
- What are the best vehicles or products for tax-time savings?
- Can and should we encourage people to increase their withholdings so they have larger refunds to save in the future?
After testing numerous prompts in 2011 and 2012, the team plans to "go live" in 2013 with an intervention that will employ the most successful prompts and incentives and offer tax filers the chance to actually save part of their refunds, automatically directed into an existing or new account, all with the click of a button. Capping off America Saves Week, the team hosted a meeting in February at the University of North Carolina with leaders in the field, top policy makers, world renowned researchers, key foundation representative and government representatives to gain more insight on how this project could fill gaps in the field. Participants were very enthused at the potential reach of this initiative and the chance to bring research, business, policy, and community practitioners together. The research from this initiative will answer critical questions for the field:
- Which types of prompts/incentives motivate the most people to save?
- Do certain prompts/incentives work better with particular demographic groups?
- What are the most cost-effective and scalable options for encouraging people to save?
This information, expected in 2013, will have important implications for research, products, and policies aimed at increasing the savings and assets of households in the U.S., especially low- and moderate-income households who are the most vulnerable to economic shocks.
Participant organizations in the February 25 meeting:
- The Alleghany Foundation
- Annie E. Casey Foundation
- Bureau of the Public Debt, U.S. Department of Treasury
- Prosperity Now
- Center for Community Capital, University of North Carolina
- Center for Economic Progress
- Center for Financial Services Innovation
- D2D Fund
- Duke University, Center for Behavioral Economics
- Ford Foundation
- Internal Revenue Service, U.S. Department of Treasury
- Intuit Financial Freedom Foundation
- Intuit, Inc.
- New America Foundation
- North Carolina Department of State Treasurer
- Office of Domestic Finance, U.S. Department of Treasury
- University of North Carolina School of Social Work
- Z. Smith Reynolds Foundation