Learnings from the lab: Framing for long-term savings

Background

Common Cents was keen to understand the barriers to long-term savings. While there is substantial research around stagnant wages, present bias, procrastination, and decision paralysis, we were curious about the role of wage framing.

There is substantial evidence that higher income households have higher contributions to retirement savings. These households are also more likely to have a yearly salary instead of an hourly wage. While it may be difficult to increase wages for everyone, it is potentially easier to change the earning frame. We predicted that the way people think about time can affect their preference to save. So we took this question to the lab.

Experiment

In order to determine whether wage-framing had a causal impact on retirement savings contributions, we tested the presentation of time in wages. We randomly assigned participants to one of two wage frames: hourly or yearly. We asked some participants to imagine earning $70k per year while we asked other participants to imagine earning $35/hr. We then asked all participants to indicate how much they would like to contribute to their savings.

We observed that participants intended to save 16% of their income when the wage was framed as a yearly salary. However, when the wage was framed as an hourly wage, we observed that participants only intended to save 11% of their income. The framing of earnings continued to impact intended contribution amounts, even when participants in the yearly salary conditions were told that $70k salary is equivalent to a $35/hour wage (and vice versa).

Next, we wanted to understand if our framing intervention impacted both short-term and long-term savings. In this second study, we excluded any reference to the actual amount of money earned. We told participants to imagine earning a yearly or an hourly salary and then asked them to indicate how much they would like to contribute to short-term savings and/or long-term savings.

Results

We found there was no difference in how much people contributed to short-term savings, but there was a significant difference in how much they contributed to long-term savings.

This effect held, even when controlling for other factors, such as: job stability, perceived financial security provided, and individual quantitative ability.

The implications of our findings suggest that a yearly salary (regardless of the amount) helps put people into a long-term mindset and creates a greater willingness to save for a long-term future. With 77.2 million workers in the United States earning hourly wages, a simple framing shift could have a profound impact on addressing the retirement savings crisis in the United States. By telling people what their expected annual salary is, rather than their hourly wage and how many hours they will work per week, we can encourage greater long-term savings.