In recent years, various new projects and experiments have been executed in hopes of finding ways to significantly increase the drive for the under-resourced to save for retirement and provide for themselves and their families long-term.
According to an article published in the Wall Street Journal (WSJ), experts believe more emphasis should be placed on helping the poor to save more, live better, and scramble up in their own way, rather than on large-scale social support and development.
One such experiment was conducted by economists at a bank in the Philippines by giving 700 locals an account with a feature that enabled them to lock up their savings accounts for months at a time and label their accounts with specific goals in mind (paying off debt, saving for education, purchasing a home, etc.) The results showed that the participants saved 82% more than those who had regular checking accounts and only mentally allotted what they were saving towards.
Experiments similar to this use the concept of behavioral economics. Behavioral economics works by addressing the financial patterns of the middle class and how consequences affect our economic behavior, then translate to those in poverty where a single error can result in severe economic consequences. Simplifying these consequences is the key.
For instance, even in the poorest areas of the world there are cellphones. Researchers are now testing the effectiveness of using text messages as reminders to people to save money for their retirement or check when their bills are due. Citizens in Bolivia, Peru, and the Philippines have increased the balance of their bank accounts by 10% on average by receiving such texts (and at a much lower cost to the researchers).
An additional example is the Savings Promotion Act passed by President Obama in December 2014, which offers to link savings accounts to prizes. Savers became eligible for a raffle drawing where they might win cash or other prizes. The science behind this shows that the potential to win far outweighs the consequences for those who struggle on a daily basis.
A couple (both of whom were unemployed) decided to sign up for one of these savings accounts with the chance of (but no real expectation) of winning a cash award. Both were incredibly surprised and grateful to soon after receive word that they had won the grand prize of $25,000, allowing them to pay off their debt and put the excess in savings.
According to the WSJ article “Until recently, most governments, development agencies and nongovernmental organizations aiding the poor didn’t rely on the scientific method to figure out what works, what doesn’t and why.
So, says MIT economist Esther Duflo, “We are trying to promote a culture of learning that will permeate governments and NGOs and businesses to such an extent that it will become par for the course.”
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