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Chapter 6 Using Financial Innovation to Support Savers: From Coercion to Excitement Peter Tufano and Daniel Schneider I n certain stylized economic models, household savings emerge mechanically and effortlessly as informed rational agents maximize lifetime consumption in light of their likely income streams, their needs, and the hazards they might encounter. In other models, households are massively confused about intertemporal trade-offs. They employ a set of time-inconsistent discount rates to evaluate options that vary greatly from period to period, and their resultant decisions may be time-inconsistent (Mullainathan and Shafir, this volume). Although these are both useful observations about household decisionmaking, they abstract away from the messiness of saving (Collins and Murdoch, this volume). Families—and of particular interest to us here, low-income families—save for a wide variety of reasons, including identifiable reasons such as education and retirement and others that they cannot even articulate (like “rainy days” or “mad money”). Definitions of what constitutes “enough”—enough material possessions, enough services, enough savings—vary widely from person to person. In this messy world, where companies never exhort us to “spend less,” savings is hard work, and it is no surprise that household savings is low. In 2007 the U.S. personal savings rate dipped to 0 percent—a fifty-year low (U.S. Bureau of Economic Analysis 2007). Although there is some debate over the proper measurement of the saving rate (Guidolin and La Jeunesse 2007), there is little dispute that large shares of Americans have very little saved. In 2004, 10 percent of households had less than $100 in financial assets (authors’ calculations from the 2004 Survey of Consumer Finances [SCF]). Even larger shares of the population are “asset-poor” or lack sufficient financial assets to survive at the poverty line for three months (Oliver and Shapiro 1990). Over the last ten years, the asset poverty rate has generally been well in excess of 25 percent for the population as a whole, and it has been approximately 60 percent for blacks and for households headed by someone without a high school diploma (Caner and Wolff 2002, 2004; Haveman and Wolff 2001). Lacking savings may make it more difficult for families to respond to emergencies, to invest in education and business opportunities, and to retire comfortably. / 149 Some analysts are pessimistic about the potential to address this problem. It may seem as though providing sufficient financial incentives to encourage lowand moderate-income families to save is too expensive and politically unlikely. Similarly, it can be difficult to imagine that the private sector will jump on board because there is not enough money to make it worth their while. While these concerns are real, we believe that they do not close the book on savings policy. Given that pressures to consume are not likely to abate, what realistically can stakeholders—governments, nonprofits, social institutions, and financial institutions—do to help families save? Given the diversity among people, it is unlikely that there is a single solution to the savings problem. Rather, we lay out a range of solutions in this chapter, illustrating this conceptual framework with concrete real-world examples of programs and products—many of which have great promise in supporting household savings. The continuum ranges from solutions that force families to save (coercion) to others that seek to work consumers into a frenzy about savings (excitement.) These varied solutions emphasize different elements of human behavior or impediments to savings. Some require massive government intervention, some require small changes in existing regulations, and still others are completely market-oriented. Some require large subsidies, while others might be profitable on their own. We discuss each program from the perspective of would-be savers as well as from that of other key stakeholders. Our notion of savings in this piece is explicitly broad: savings is the deferral of consumption today to enable the use of funds later. That later period may be decades away, as in retirement. Or, in low-income communities, the deferral may be only a matter of weeks or months until a water heater breaks. We make no value judgments that only “long-term” savings can be helpful to families. To the contrary , short-term savings can be critical. An emergency fund that allows a family to quickly repair a car needed to get to work can be essential. Also, while most of the concepts we discuss could apply to people of all income levels, our emphasis is on savings structures that would be relevant...


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