This study provides an overview of previous research on nudges and pension savings. Moreover, a number of proposed changes within the current pension savings system are discussed, in which nudges can be used to improve individuals’ decisions. A nudge is any aspect of the choice architecture that influences people’s decisions without using mandates or significant economic incentives.
A number of different types of nudges are presented, including default options, information related to identity, commitment, social norms, framing effects, intentions and reminders. For each nudge, a few empirical applications are presented in order to illustrate how a nudge could work. A nudge is more likely to be successful in affecting individual choices if the decisions are (i) fast and intuitive, (ii) related to self-control problems and/or (iii) related to aspects that affect the individual’s identity and for which there are strong prescriptive norms.
In particular, the overview reveals that there are two types of nudges that have been shown to be successful. The first is a default effect. For example, since many people will not make an active choice, the design of the default option they will receive is very important. By making enrollment in savings automatic, and by designing the default alternative in a particular way, it is possible to increase saving rates drastically. The second is a program called “Save more tomorrow”. With this nudge, individuals are asked to commit to future increased savings, linked to future wage increases.
In the study it is argued that more empirical studies on nudges and savings are needed, since very little is known about the effects of nudges on total savings, and that designing nudges requires in-depth knowledge about both the system and how and why individuals are making decisions. Finally, a few changes within the current Swedish pension system are discussed. In particular, it is suggested that the automatic payment of occupational pension savings at the age of 65 should be removed, since it is likely that this is an unintended nudge to retire at 65.
This report is part of the research program “New Challenges for the Pension System.” The program takes an overall perspective of the pension system and deals with questions that concern both the occupational pension and the state pension.
The report was presented at an SNS seminar in Stockholm on November 14, 2016, where Tomas Flodén, Chief of Staff at AMF, Ole Settergren, Head of the Analysis Department, Swedish Pensions Agency, and Solveig Zander, Parliamentary Member of the Centre Party and a member of the Parliamentary Pension Group participated.
“In general, we do not save too much for our retirement, but there are many who will receive low pensions, and only some of them have the opportunity to save”, Ole Settergren from the Swedish Pensions Agency, said.