In most things, I adhere to the principle that free trumps fee. Accordingly, I happily opt to run through my neighborhood, braving variable weather conditions and swarms of families with dogs and strollers, to avoid paying a gym for what I can accomplish for free.
So, how did Groupon get me to join a gym?
Simply put: Groupon made it cheap and easy. At its core, the Groupon approach engages people through a widely utilized platform (e-mail), presents them a few appealing options (“Deal of the Day” and “Side Deals”), offers an incentive to participate (discounted products and services), and makes participating easy (just click “Buy” to “Get Your Groupon”). Participants try something they wouldn’t have otherwise and retailers have customers they wouldn’t have had otherwise. It’s a win-win.
So, could we apply that model to more consequential activities than trying a new restaurant or body waxing, like increasing personal saving?
As the experiencee of the recent recession has shown, having access to a pool of resources is an essential yet often-overlooked feature of economic security. Income alone usually isn’t enough to pay for day-to-day inconveniences, like a car breaking down, or finance aspirations, like moving to a neighborhood with a better school district or helping a child pay for college. Savings provide families the resources to cover life’s expected and unexpected events and improve their circumstances. While these roles are critical, according to researchers at the Urban Institute, almost one-third of all families and over two-thirds of the poorest families couldn’t subsist for three months on their savings at the official poverty line without income.
The Groupon approach to saving isn’t unprecedented; it’s already applied to retirement savings. Employees enroll in a sponsored plan at the workplace (a widely utilized platform), often with match from the employer (incentive to participate), with contributions automatically deducted from their paycheck (participating is easy).
But there are important ways that this application is limited. First, only half of all workers and less than one-third of workers in the lowest-income quartile are offered an employer-sponsored, 401(k) style retirement plan. You can’t buy a Groupon if you don’t have e-mail. Second, retirement savings are important in the long run, but families have a variety of needs that may make saving for another purpose a higher priority. Half-off car detailing, while a good deal, doesn’t help someone who rides a bike. Finally, the $140 billion the government currently spends to encourage saving for retirement mostly accrue to higher income earners who would have saved anyway. Retailers participate in Groupon to bring in new business, not subsidize existing customers. We can’t afford to confuse spending with investment, especially when the “retailer” is the government.
Saver's Bonus Act
The Saver’s Bonus Act, a bill introduced by Sen. Robert Menendez (D) of New Jersey, takes the Groupon approach to saving and targets the low- and middle-income families for whom this model is most likely to make a difference.
First, the bill leverages the widely utilized platform of the tax-filing process. Second, it offers several appealing savings options: retirement plans, college savings accounts, and shorter-term products like Savings Bonds and Certificates of Deposit are eligible so families can choose the purpose that is most appropriate for them. This flexibility should increase the likelihood that they will make the choice to save. Third, it offers an incentive to save by providing a dollar-for-dollar match up to $500. Since most of these households have incomes too low to benefit from the preferential tax treatment that subsidizes the savings of higher-income households, The Saver’s Bonus will capture the savers most in need of this support and transform the incentives into new savings. Finally, The Saver’s Bonus proposal makes participating easy by allowing tax filers to open an account and make a deposit directly on the tax form. It then automatically sends the bonus straight into the desired account.
Over the past three years, a version of The Saver’s Bonus has been tested at the local level in New York City and is now being replicated with federal support in cities across the country as SaveUSA. Many participants in the New York program initially lacked a savings or even checking account. By the conclusion of the third year, 2,200 very low-income people had saved an average of $560, and evidence suggests that savings is becoming a habit, as almost three-quarters of participants continued saving a year after opening their account.
The Saver’s Bonus Act incorporates design elements proven by the marketplace (as my gym membership can attest). It has the potential to overcome a major obstacle to economic stability in the US by introducing new savers into the market. In short, it can help more families “Get their Saveon.”