Mailliard-webOnly about one-third of Americans are saving enough for retirement. So claims UCLA economist Shlomo Benartzi, author of Save More Tomorrow and host of TED Talk “Saving for Tomorrow, Tomorrow.”  Through his study of behavioral finance, a hybrid of economics and psychology, Benartzi seeks to understand why people are not saving, and from there, devise solutions.

Benartzi identifies three major behavioral obstacles to saving. Inertia is number one. It is easy to become overwhelmed with today’s to-do list. Something that requires special effort often gets put off to tomorrow.  About one-third of employees with access to 401(k) plans that require proactive sign-up and navigation of complex choices do not participate.  “Lack of action is a powerful default,” said the professor.

A second obstacle to saving is loss aversion.  We can be over-sensitive to relatively small losses. To illustrate, Benartzi asks his audience to imagine withdrawing $100 from an ATM and then losing a single $20 bill. Most of us would be very bothered by that, even though it is really a minor loss. Many would-be savers are wired to view savings as a loss, as it involves the loss of spending today.

Economists call the third obstacle to saving present bias or myopia.  With heavy focus on the immediate present, what is right in front of us, we anticipate our future choices will be better than they end up being.  We intend to do all the right things… tomorrow.  Benartzi illustrates:  We anticipate snacking on fruit this afternoon, but come snack time, we choose sweets. “Self control is not a problem in the future. It is only a problem now when the chocolate is next to us,” quipped Benartzi.

Understanding obstacles to saving will help you overcome them.

Benartzi advocates simple behavioral science tools and 401(k) plan redesign to help overcome these obstacles. Rather than requiring proactive opt-in, he recommends that plan participation be the default assumption for employees. Plans should have fewer, not more, investment choices. And, plans should include a mechanism for automatic, gradual future savings rate increases.