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Applying Behavioral Sciences in the Real World
Nudging people to save: The $aveNYC Account
New York City Mayor Michael Bloomberg at a 2009 press conference announcing the launch of $aveNYC
Guest Blogger: Caitlyn Brazill, Director of Research and Policy, NYC Department of Consumer Affairs, Office of Financial Empowerment
We all know that saving money is a struggle. We know we should save more for retirement and emergencies, spend less on vacations, and avoid the (in)famous $4 cup of coffee. Many of us rely on our jobs and our financial institutions to help us: make automatic deductions into retirement accounts, automatic transfers from our checking to savings and even new handy programs that roll the change from our debit purchases into our savings accounts. All of these tools stem from a simple logic – if I can’t touch it, I can’t spend it.
But for families with very low incomes who live in highly expensive cities like New York, even putting pennies aside every month is a stretch. Our research in New York City found that many low wage workers don’t have access to retirement accounts or even direct deposit to facilitate automatic savings. And the average financial institutions pays less than 1% in interest, yet charges $3 a month to maintain a savings account with less than $500 in it. It seems that if you don’t have a lot of money to save, you have to pay the bank to hold your money, rather than the other way around.
As a result, a Community Services Society poll last year found that 56% of New York City low- and moderate- income households had less than $500 in savings. Lacking savings has a huge impact on household stability; OFE's research has found that in two low-income NYC neighborhoods, 30% of households were unable to pay rent at least once in the last year.
In 2006, Mayor Bloomberg launched the Department of Consumer Affairs’ Office of Financial Empowerment to meaningfully reduce poverty in NYC. The Office of Financial Empowerment (OFE, as we call it) is an initiative of the Mayor's Center for Economic Opportunity and our goal is to educate, empower and protect New Yorkers with low incomes in the financial services marketplace. One of our first priorities was to figure out how to help people with very little money avoid expensive credit options like pawn brokers or internet payday lenders by building savings they could use in emergencies.
With the help of a few behavioral economists and generous support from several foundations, we set out to create an account that would offer people with low incomes a strong financial incentive to save. With what we already know about behavioral economics, tax time seemed like the perfect time to help people save: you’re already thinking about money, you’re more likely to save a lump sum check than a little extra in your check, and, through the IRS’s split refund option, you have an opportunity to send the money right into savings without ever laying your hand on it. So, we created $aveNYC.
The $aveNYC program offers a 50% savings match to families who make less than $45,000 a year and single tax filers who make less than $20,000. The match was capped at $250 for the first two years, and we raised it to $500 in 2010. To receive a match participants must open accounts the day they are filing their taxes, direct deposit a portion of their tax return into their new $aveNYC account, and keep the funds in their account for a full year.
The accounts are held at several community development banks and credit unions and are offered exclusively at free tax sites run by a network of non-profit organizations throughout the city.
So far, the results have been extremely exciting. Since the initial test in 2008, over 2,500 accounts have been opened – and each year so many people have wanted to save that we've had more savers than available match money.
Overwhelmingly, tax-filers who decide to open the accounts are African-American or Latina mothers with an income that's (on average) only $17,000 a year. Despite low-income levels and tough economic times, 80% of participants saved for the full year and received their match. Over half a million dollars was saved ($544,725) in 2008 and 2009.
Our data shows that for most participants in the program, this is the first time they’ve successfully saved a portion of their tax return. More than 25% of people who open a $aveNYC account have no other checking or savings accounts when they start the program, and 27% reported to us that they had no savings when they opened the account.
Our research partner, the Center for Community Capital at UNC- Chapel Hill found that people who opened a $aveNYC Account were four times more likely to still have some of their tax return 6 months after they filed their taxes than a matched comparison group of people who filed their taxes at other VITA sites. We’ll know even more in the coming year, but it's clear that $aveNYC is helping people to become savers.
Each year, we’ve listened to program partners, financial institutions and tax-filers to improve our program. From the first year to the second, we formalized our partnerships with the tax sites, improved our marketing to focus on what people are saving for, increased staff and volunteer training and eliminated the requirement that participants be EITC filers (73% still are). As a result, our participation rate increased by 50%, which shows that designing a good product is only half the battle – helping people access it requires thoughtful, behaviorally informed, onramp design.
In 2010, we changed the contribution parameters, requiring tax filers to save at least $200 (instead of $100) and allowing savers to receive a match of up to $500 (instead of $250). Again, small changes had large effects on behavior, nearly doubling the average savings.
$aveNYC demonstrates what the impact of a new tax policy could be – a change that would create a refundable tax credit that rewards low wage workers for saving, the same way that taxpayers are currently rewarded for buying homes, putting away funds for retirement or investing in their own education or their children’s. Similar proposals are being discussed on Capitol Hill right now, and we hope our findings will help shape those proposals.
We will to continue to study the effects of $aveNYC and to report back on the impact of the account on New York families. So stay tuned for further lessons learned.
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