Increasing Voluntary Contributions to Retirement Savings in Colombia
In Colombia, as in many other countries, workers face many barriers to saving for retirement. The situation is much worse for informal workers, who make up about 65 percent of the total workforce in Colombia. To investigate ways to increase voluntary retirement contributions, Innovations for Poverty Action is collaborating with Colpensiones, the public defined-benefit provider, and the Inter-American Development Bank to conduct three waves of rapid-fire randomized evaluations that will measure the impact of text messages on retirement savings behavior. Researchers are conducting related research in Mexico on the impact of different messaging strategies on savings contributions to retirement savings.
While saving for retirement is essential for the future well-being of working age people, saving for the future is difficult and voluntary contribution levels tend to be low across the world. Research has shown that barriers to saving are wide-ranging: they include transaction costs (both monetary and non-monetary), a lack of information or knowledge, social constraints, a lack of trust in the financial system, ill-designed regulation, as well as human tendencies that hinder good decision-making (“behavioral biases”).1
Behavioral biases are now considered a significant, but often overlooked, contributor to the problem of under-saving. Research suggests that even those with access to convenient and trusted financial products and a thorough understanding of financial concepts still face significant behavioral barriers to following savings plans. In spite of their best intentions, individuals tend to spend on day to day consumption, giving in to temptation or more immediate needs, rather than prioritizing saving for future needs that are less salient.2 In developed countries, interventions aimed at overcoming these behavioral biases have been found to be successful in increasing employee savings for long-term retirement fund products.3 However, there is a need for more evidence on the use of behaviorally-informed tools to promote retirement savings in the developing world, and in Latin America in particular.
In Colombia, retirement savings levels are low. Although 16 percent of an employee’s salary must be deposited in a public defined-benefit plan or in a private defined-contribution plan, only 13 percent of those with a public plan and 25 percent of those with a private plan are projected to reach the minimum savings necessary to receive a pension from these plans.4 The situation is even more dire for informal workers—estimated to be 65 percent of the total workforce.5 To protect this sector of the population, in 2015 the Colombian government launched the Beneficios Económicos Periódicos (BEPS) program, an alternative and voluntary saving system that provides annuities to workers in the informal sector once they reach retirement age.
This research builds upon a pilot study that IPA conducted with Colpensiones, the public defined-benefit provider, and the National Planning Department’s Office of Monitoring and Evaluation of Public Policies (DNP-DSEPP) in late 2016, which examined the impact of using text messages to increase savings behavior. While preliminary results from the pilot indicate that messages can improve savings behaviors, IPA is now working with Colpensiones and the IDB’s Labor Markets Unit to further investigate the impact of a variety of messaging strategies on retirement savings behavior.
Researchers are partnering with Colpensiones and the IDB’s Labor Markets Unit to conduct a series of randomized evaluations on the impact of various messaging strategies on retirement savings behavior. Researchers will conduct three rapid-fire randomized evaluations over one year, each lasting approximately four months, which will each address different behavioral barriers to saving for retirement. This iterative research design enables researchers to optimize the messages tested and quickly inform Colpensiones on the most effective and lasting strategies for improving savings behavior.
Behavioral messages: The first wave will test the effectiveness of three different behavioral-based messaging strategies. Among the 690,000 BEPS eligible account holders, 390,00 users will be randomly sampled to participate in the study. From the study population, 240,000 users will be randomly selected to receive one of the messaging strategies while 150,000 users will not receive any messages and will serve as a comparison group. The specific language used in the messages will vary depending on the age of the recipient. Furthermore, each message will include a different behavioral framing, which builds upon a framework identified by Ideas42: making retirement feel vivid and present, making retirement visible and common, and reducing the sense of loss associated with saving.6
Savings goal messages: The second wave will test the effectiveness of setting different levels of annual savings goals for users. High, medium, and low saving goals will be assigned based on an individual’s savings behavior the previous year. After establishing the goal, subsequent messages will inform users about their progress towards accomplishing their goal with some users receiving the goal framed as a monthly goal and others receiving goal framed as an annual goal. Among the 240,000 users in the behavioral messages treatment group, 155,000 users will be randomly selected to receive the savings goal messages in the second wave. The remaining 85,000 users will stop receiving any messages.
Long-term impacts: The third wave will focus on measuring the persistence of effects observed in the first and second waves over four, eight, and twelve months following the intervention. During this wave, among the 155,000 users that received savings goal messages, 60,000 users will be randomly selected to continue receiving messages, and the remaining 95,000 users will stop receiving messages after the second wave. The messages will be designed based on the best performing strategies identified in the previous waves.
Activating inactive users, boosting the messaging effect: In addition to the messaging strategies, 80,000 users who have never completed a transaction in BEPS will be randomly selected to receive a simple phone call during the third wave informing them about their saving account. Four types of calls will be tested: human interactive, human rigid, prerecorded interactive, and prerecorded rigid.
The research team will collect transaction-level administrative data to measure the impact of these different messaging strategies on the number of savings transactions and savings account balances of BEPS account holders.
Project ongoing; results forthcoming.
1Karlan, Dean, Aishwarya Lakshmi Ratan, and Jonathan Zinman. 2014. "Savings by and for the poor." The Review of Income and Health 60: 36-78.
2Karlan, Dean, Aishwarya Lakshmi Ratan, and Jonathan Zinman. 2014. "Savings by and for the poor." The Review of Income and Health 60: 36-78.
3Thaler, Richard, and Shlomo Benartzi. 2004. “Save More Tomorrow: Using Behavioral Economics to Increase Employee Saving.” Journal of Political Economy, 112(S1): S164-S187.
4Montenegro Trujillo, Santiago, Luis Felipe Jimenez Salazar, Sebastián Ramirez Baquero, Alejandro Nieto Ramos y Carlos Arturo Hurtado Martilletti. 2013. "Distribución de ingresos en el sistema pensional y el impacto de algunas medidas de flexibilización" Universidad de los Andes–Facultad de Economía–CEDE, 32.
5Montenegro Trujillo, Santiago, Luis Felipe Jimenez Salazar, Sebastián Ramirez Baquero, Alejandro Nieto Ramos y Carlos Arturo Hurtado Martilletti. 2013. "Distribución de ingresos en el sistema pensional y el impacto de algunas medidas de flexibilización" Universidad de los Andes–Facultad de Economía–CEDE, 32.
6Fertig, Andrew, Jaclyn Lefkowitz, Alissa Fishbane. 2015. "El uso de las ciencias del comportamiento para aumentar los ahorros para el retiro, una nueva mirada a las aportaciones voluntarias a las pensiones en México." Ideas 42.
7IPA conducted four focus groups in May 2017 to understand the common behavioral and knowledge barriers BEPS users faced when saving for retirement. Colpensiones conducted 6,000 phone surveys in March 2017 with the objective of identifying the determinants of savings among BEPS users as well as the factors that could influence an increase in the number of active savers in the program.