By David Wessel | The Wall Street Journal – Thu, Apr 12, 2012 12:01 AM EDT
“People want to have a ready way to save,” says Michael Barr, a University of Michigan law professor and a former Obama and Clinton Treasury official. “For some families, tax time is a good time to do so.”
In the mid-2000s, Mr. Barr and colleagues surveyed about 650 low- and moderate-income families in the Detroit area who had filed tax returns in 2003 or 2004. About 82% received refunds—either because they had overpaid or because they qualified for the federal Earned Income Credit, a federal cash bonus to low-wage workers that is paid through the IRS. The average refund exceeded $2,000, a significant sum for people who say they have trouble making ends meet.
Retailers often target refund recipients, and half the Detroiters said they spent all the refund, most often to pay bills or debts or to buy appliances or cars.
Half the recipients saved at least some of the refund. “There is a desire to save,” Mr. Barr says. “The saving is not for retirement. It’s for short-term goals, for financial stability, so if tough times hit, they don’t have to go see the payday lender or go to family and friends or stop eating.”
In fact, Mr. Barr and co-author Jane Dokko of the Federal Reserve Board, found these folks don’t want smaller tax refunds. In the survey, researchers offered them choices: Withhold $100 a month more and get a bigger refund (an option favored by 35%), withhold the same amount and get the same refund (46%) or withhold less and get a smaller refund (only 19%). This and other survey findings appear in a coming Brookings Institution book, “No Slack: The Financial Lives of Low-Income Americans.”
Behavioral economists have found that people respond better to a nudge than a simple up-or-down choice, an observation that has led many employers to automatically enroll workers in retirement-savings plan (and allow them to opt out) instead of asking if they want to enroll or not. A 2005 academic experiment in which some H & R Block customers were offered a 20% or 50% match when they learned the size of their refund if they put money into an Individual Retirement Account proved more successful than the little-understood Saver’s Credit in the tax code that offers much the same incentive.
Pushed by the Treasury and outside academics, the IRS has been experimenting with ways to nudge people to save at refund time. In the mid-2000s, it began allowing taxpayers to split tax refunds between, say, a checking account and a savings account or an Individual Retirement Account. Last year more than 750,000 people took the option, an increase of 36% from 2010.
But that requires the person to have a pre-existing savings account or an IRA; a lot of low-income people don’t. Last year, the Treasury mailed letters to 808,000 taxpayers likely to have low or moderate incomes and offered to load their refunds on a debit card; only 239 took the offer, according to the inspector general for tax administration.
Another experiment appears a bit more promising. Two years ago, the IRS began asking taxpayers if they wanted to use some or all of their refund to buy a U.S. savings bond. Last year, about 30,000 people bought $11.5 million in savings bonds. The program is very small, but growing. So far this year, sales are running 60% above year-ago levels.
While the Treasury is doing away with paper savings bonds for everyone else, it has made an exception for these savers, figuring making the savings tangible is important.
The goal is “to create as many avenues as possible to make it easier to save,” Mr. Iwry says. “Someone who begins saving at least part of their tax refund might acquire the habit and start saving in other ways as well.”
None of this is going to solve the national savings dearth. Most personal saving in the U.S. will continue to be done by people with lots of money to spare. These experiments, instead, are aimed at making individuals a bit more financially secure, a creative attempt to promote a culture of saving in a country with too little of it.