Refund to Savings (R2S) Initiative

Refund to Savings (R2S) Initiative: Exploring the Intersection of Behavioral Economics and Asset Building at Tax Time and Beyond

If a natural disaster struck your home or vehicle, how soon would you be able to access the funds to make the necessary repairs? Recent research reveals that 47% of Americans couldn't raise $2,000 within a month in the event of an emergency. The Refund to Savings (R2S) Initiative aims to address Americans' lack of savings by encouraging taxpayers to save part or all of their tax refunds.

In a previous blog post, researchers from the University of North Carolina at Chapel Hill described the R2S initiative and outlined its primary goal—to apply the principles of behavioral economics to design and test savings prompts, financial incentives, and various financial products integrated into the customer experiences in tax preparation software, such as TurboTax. R2S, spearheaded by partners from UNC, Duke University, and Intuit Inc., has a number of promising features, such as:

  • A focus on increasing savings without relying on federal resources
  • An innovative partnership between researchers and private industries to test ideas
  • Potential for broad impact and reach through partnership with Intuit Inc., a leader in tax time products and services

In a one-day meeting in February 2011, UNC researchers convened leaders in the field of savings and asset building to discuss the R2S project components and the project's potential implications for policy and practice. A new report from UNC, based on this meeting, sheds light on what we already know and what remains to be learned about saving at tax time.

What We Know
Research suggests a number of key findings on tax-time savings for LMI individuals and families:

  • People often intend to save a portion of their tax refund, but they just can't for various reasons (i.e., debt payments, home repairs or other expenses that claimed their money long before it was received).
  • Providing matching incentives for saving is a good way to encourage participation in savings; however, raising the match cap is a better predictor of savings rates.
  • Framing and providing information about tax savings opportunities is important to a filer's reception of savings programs. As a result, the tax preparer plays a significant role in the take-up rate of consumers' tax-time savings products.
  • Many individuals that open savings accounts through the refund process are first time savers.
  • By offering chance rewards to participants, instituting lotteries can be an effective incentive for increasing saving.

Data from TurboTax on their customers' behavior sheds further light on the savings behavior and intentions of taxpayers.

  • Regardless of household income, intent to save for retirement is low—lower income households plan to spend more of their refund for living expenses.
  • Settling debt is one of the most popular uses of refunds, regardless of household income.
  • Flexibility to spend on non-essential items goes up as the refund amount increases.

Aside from the fact that people generally don't like paying taxes in the first place, participants at this meeting discussed a number of obstacles to greater savings at tax time:

  • Uncertainty about the level of tax savings significant enough to positively change an individual's financial security
  • The need to shift pre-tax spending intentions to incorporate a more savings conscious mind-set
  • Complexities of opening savings accounts which may deter people from saving
  • Banks tend to worry about accounts with low deposits and numerous overdrafts

What Remains to be Learned
During the meeting, attendants discussed the merits and limitations of saving "prompts" used to help accumulate savings. These prompts require careful consideration and are important in the promotion of actual behavior change at tax time. These include:

  • Social proofs that provide data on the savings behavior of one's peers. Listing, for example, the number of people saving in a particular zip code can serve as a benchmark for taxpayers.
  • Providing positive testimonies about the products offered, with the rationale that others will listen to people like them and be influenced.
  • Affirmations that evoke positive emotions (i.e. think of something happy before asking about refund savings) can influence the willingness to save.
  • Regret opportunities prompt taxpayers to think of the future and consider what will happen long term if they don't save today.
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