Do Nudges Last Forever? Perhaps in Sweden

Do Nudges Last Forever? Perhaps in Sweden

Sweden’s retirement savings reform provides a case for examining the number of choices, the treatment of a default, and the persistence of inertia. The authors ask whether the effects of the original design endure as participants remain in the plan.

The authors discuss Sweden alongside the UK NEST plan as examples of public involvement in defined-contribution retirement saving. One reason is that the traditional safety net plans such as Social Security are usually funded on a “pay as you go” basis, meaning that the taxes paid by people working now support the benefits to those retired. That system is being threatened by two demographic trends. The first is that people are living longer, which means they collect benefits for more years. The second is that people are having fewer children, so the ratio of workers to retirees is falling, threatening the viability of the system.

A pioneer in this space was Sweden, which (after a long period of planning) launched its plan in 2000. Because of its unique approach, it offers some unique insights into choice architecture. First, a bit of context. As one might guess, Sweden has a very generous social safety net, and retirement savings are no exception. The social security tax rate is 16 percent of income. Participation is mandatory and it is mostly a defined-benefit plan. The reform we are discussing here was to carve out a portion of that tax to create individual defined-contribution accounts in what they called the Swedish Premium Pension Plan. Here we will just call it the Swedish plan for short.

Because participation is mandatory, neither automatic enrollment nor escalation is relevant in this context. Rather, our focus will be on other features of the choice architecture, specifically the number of options offered in the plan and the design and treatment of the default fund that was created. Because the plan has now been around for two decades, we can also examine how participant behavior varied over time. In particular, we can examine a question that is often difficult to answer: How long do nudges last? The long-term findings needed to answer this question are not included in this excerpt.

If we were to pick a single phrase to characterize the design of the Swedish plan, it would be “pro-choice.” In fact, the plan is a good example of the Just Maximize Choices strategy. Give people as many options as possible, and then let them do whatever they want. At almost every stage, the designers opted for a laissez-faire approach. In particular, the plan had the following key features:

• Participants were allowed to create their own portfolios by selecting up to five funds from an approved list.
• One fund was chosen (with some care) to be a default fund for anyone who, for whatever reason, did not make an active choice.
• Participants were encouraged (via a massive advertising campaign) to choose their own portfolios rather than rely on the default fund.
• Any fund meeting certain fiduciary standards was allowed to enter the system. Thus, market entry determined the mix of funds from which participants could choose. As a result of this process, there were initially 456 (!) available funds.
• Information about the funds, including fees, past performance, and risk, was provided in a booklet to all participants.
• Funds (except for the default) were permitted to advertise to attract money.

You may be asking yourself, are we sure this happened in Sweden? The plan is one that would make Milton Friedman happy. From his point of view, the combination of free entry, unfettered competition, and lots of choices would seem great. But knowledgeable choice architects might worry that presenting Humans with so many choices might create problems. The excerpt ends before reporting how participants responded.