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Economists have spent a lot of time lately thinking about the implications of “excess savings”: money that households built up during the pandemic when they were locked down with nothing but Netflix and sourdough kits to spend their cash on. But it’s worth remembering that not everyone could stay at home and a large number of people still have barely any savings at all.
In the US, 21 per cent of households in 2022 said they would not be able to cover their expenses for more than two weeks if they lost their main source of income, according to survey data from the consumer protection regulator, similar to the 20 per cent in that position pre-pandemic. In the UK, the government’s latest family resources survey found that four in 10 families had less than £1,500 in savings and investments.
Yet there is plenty of evidence for the protective power of having a “rainy day fund”. Research from Morningstar found the amount of savings a household had before the pandemic “robustly predicted” its ability to manage its debt and pay its bills on time, even after controlling for income, age and partnership status.
Policymakers have struggled so far to do much about it, however. In the UK, the government’s “Help to Save” scheme offers bonuses to low-income households who save money, but take-up has been low.
Nest Insight, the research arm of the UK state-backed pension fund, has had more success with its “sidecar saving” trials with various employers, including BT and ITV.
In these schemes, the employer puts a proportion of an employee’s salary into an instant-access savings account each month on their behalf. Once the rainy-day fund reaches a certain size (chosen by the employee), the monthly payment starts padding out their pension instead. But if the employee dips into the rainy day fund, which they can do whenever they want, their payroll deductions will steadily refill the pot first before going into their pension again.
The good news from these trials was that participants said they liked it and they tended to stick with it: roughly three-quarters were still saving regularly through payroll deductions after 18 months. Some used their savings for emergencies such as broken-down freezers, while others used the accounts to save for planned events like Christmas.
The bad news was that not many people opted to take part in the first place. For every 100 eligible employees, 46 said they thought the product would help them, 14 said they were likely to sign up, and only one followed through.
What happened next was telling. Nest Insight set up three new trials, and this time employees had to opt out if they didn’t want to take part, rather than opt in. Participation rates shot up by 45 to 50 percentage points. Those who participated still used their savings pots, so they knew they were there.
As one employee in the opt-out trial said, “Now I have savings, I’ve never had savings before, that’s a nice feeling . . . I thought it was a good idea [but] I never would have sorted it out myself. I didn’t have to do anything.”
Policymakers in the UK are already aware of how powerful this sort of nudge can be. In 2012, the country became one of the first to require employers to enrol almost all employees automatically into a workplace pension. Workers could opt out, but by default they and their employers would pay in. As a result, the proportion of employees participating in a workplace pension has shot up from less than half to almost 80 per cent.
The UK isn’t the only country exploring this method to encourage people to save. Under the Secure 2.0 Act in the US, employers can from 2024 automatically enrol some employees in an emergency savings account as part of their retirement plan.
Is it a good idea? I can think of two objections. The first is that now is not the right time, given how squeezed people are for money as a result of high inflation. In other words, you shouldn’t push people to save for a rainy day when it’s already raining. Against that, about half the people in the UK trials did opt out, which suggests the nudge isn’t excessively powerful.
The second objection is that it is too paternalistic and interventionist. People should overcome inertia to save money themselves, not be prodded into it by employers or the state. This, I suppose, comes down to philosophy: do you deal with human nature as it is, or as you would like it to be? Some people save already. Some people can’t save right now. The rest might just need a nudge.
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