By Neil Schoenherr
Motivational prompts to save tax refunds and suggested savings amounts for the tax refund can increase saving among low- and moderate-income households, finds a new experimental study from the Brown School at Washington University in St. Louis.
The study was conducted as part of the Refund to Savings Initiative, a collaboration of academic researchers and tax industry experts from the Center for Social Development at the Brown School, Duke University and Intuit Inc., the maker of TurboTax tax preparation software. The collaboration, launched in 2012, uses behavioral economics to encourage tax filers to save their tax refund so they can better manage emergencies or reach their long-term goals.
The Refund to Savings Initiative is based on the idea that tax time is an opportune moment to encourage low- and moderate-income households to save, as the tax refund is often the largest single payment these households receive all year.
This study covers the first year of the Refund to Savings experiment, which has since developed into the largest national savings experiment in the United States.
The experiment involved households that filed income tax returns with an online preparer and chose to receive their refund electronically. These filers were randomized into eight treatment groups, which received different combinations of motivational savings prompts and suggested shares of the refund to save — either 25 percent or 75 percent — and a control group, which received neither prompts nor suggested savings amounts.
The study, “Behavioral Interventions to Increase Tax-Time Saving: Evidence From a National Randomized Trial,” shows that treatment group members were more likely to contribute at least some of their refund to a savings account and more likely to split their tax refund. The study is published in the spring issue of the Journal of Consumer Affairs.
“Our study adds to the growing body of research on interventions that center on tax filing as a potential way to increase saving among low- and moderate-income households,” said lead author Michal Grinstein-Weiss, professor at the Brown School, associate director of the Center for Social Development and founding director of the Envolve Center for Health Behavior Change.
“These interventions are promising since they have relatively low costs and are scalable to a broad population,” she said.
Additionally, the study suggests that the presentation of choices — called choice architecture by behavioral scientists — can significantly influence outcomes.
The study found that savings anchors, which are suggestions that filers save a certain percentage of their refund, made a difference in savings behavior, unlike messages prompting filers to think about emergencies, retirement or special purchases.
The anchors were aimed in part at encouraging tax filers to split their refund between a savings account and other accounts, and the size of the anchor was strongly associated with the amount placed into savings for those who split the refund. For example, the 50 percentage-point difference in the two suggested savings anchors — 25 percent and 75 percent — is associated with a 30 percentage-point difference in the actual amount of the refund contributed to a savings account, said Grinstein-Weiss. The anchors also increased savings rates and savings amounts across the tax-filing population in general.
In contrast, specific savings prompts for general, emergency and retirement savings did not raise contributions to savings, and in some cases actually reduced contributions.Co-authors on the study are: Blair D. Russell, former senior research analyst at the Brown School; William G. Gale, Arjay and Frances Miller Chair in Federal Economic Policy at the Brookings Institution; Clinton Key, officer for research, savings and financial security at The Pew Charitable Trusts; and Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University.