Association for Public Policy Analysis & Management

American households, and low- and moderate-income (LMI) in particular, do not have enough savings for unforeseen drops in income or rise in expenses. Nationally representative data from the Pew Charitable Trusts (2015a) found that 41% of households do not have enough liquid savings to cover a $2,000 expense; for low income families that rises to 78%. Financial emergencies are also commonplace: 60% of American households report experiencing a financial shock in the past year (Pew Charitable Trusts, 2015b).

The tax refund offers a small period of relief from the low level of liquid funds that households have on hand. For LMI households, the tax refund may be the only time of the year they can afford to make big ticket purchases, pay down debt, set aside money for their children, or save some money for a rainy day (Halpern-Meekin et al., 2015; Barr & Dokko, 2012; Grinstein-Weiss et al., 2015). The Refund to Savings (R2S) project is an innovative and ongoing collaboration between academics and tax preparation experts to encourage filers to make positive financial decisions by capitalizing on the tax time moment. Much evidence demonstrates that subtle changes using behavioral economics made in the context of decision-making can change individuals’ financial behavior. These nudges have been deployed in many settings, including retirement accounts (Thaler & Benartzi, 2004;), college savings (Beverly, Kim, Sherraden, Nam, & Clancy, 2015), college financial aid (Castleman & Page, 2015), and consumer debt repayment (Jones, Loibl, & Tennyson, 2015).

Researchers tested behavioral economics techniques in a randomized controlled trial within the TurboTax Freedom Edition, a free online tax filing system used by approximately one million LMI filers each year. Results are drawn from a dataset of very accurate administrative tax data. In the 2015 experiment, the R2S collaborators tested choice architecture, including: anchoring users to save their whole refund combined with three different motivational prompts (either saving for emergencies, retirement, or their future) to encourage users to save their federal refunds. The experiment included random assignment of 646,116 participants with an average household AGI of $15,055 and an average refund of $2,030.

Results indicate that the R2S intervention led to an increase of more than 21,012 additional households depositing into savings vehicles, totaling $35.6 million in deposits. Specially, the control group deposited into savings accounts at a mean rate of 8.5% while the emergency, future orientation, and retirement treatment groups deposited at a rate of 13.4%, 12.6% and 12.5% (p<.001) respectively. The control group deposited an average of $160 of the refund; the emergency, future orientation, and retirement treatment groups deposited an average of $244, $230, and $229 (p<.001), respectively. Further sub-analysis will also be presented.

Evidence from the R2S experiment suggests that small nudges can increase positive financial behavior during tax time for LMI households. Furthermore, this initiative is an example of how small, nearly costless changes to large systems can have an impact on thousands of people. The lessons learned from R2S can be used to influence the administration of other social welfare programs.