Can behavioral nudges and incentives help lower‐income households build emergency savings with tax refunds? Evidence from field and survey experiments

• Published date: 01 January 2023
• Author: Mathieu Despard,Stephen Roll,Michal Grinstein‐Weiss,Bradley Hardy,Jane Oliphant
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/joca.12498

RESEARCH ARTICLE

Can behavioral nudges and incentives help

lower-income households build emergency

savings with tax refunds? Evidence from field

and survey experiments

Mathieu Despard

1

| Stephen Roll

2

|

Michal Grinstein-Weiss

2

| Bradley Hardy

3

| Jane Oliphant

4

1

Department of Social Work,

UNC-Greensboro, Greensboro,

North Carolina, USA

2

Social Policy Institute, Brown School,

Washington University in St. Louis, St.

Louis, Missouri, USA

3

McCourt School of Public Policy,

Georgetown University, Washington,

District of Columbia, USA

4

FirstPic, Inc, Gambrills, Maryland, USA

Correspondence

Mathieu Despard, Department of Social

Work, UNC-Greensboro, P.O. Box 26170,

Greensboro, NC 27402-6170, USA.

Email: mdespard@uncg.edu

Funding information

Annie E. Casey Foundation; Intuit

Foundation; J.P. Morgan & Chase Co.

Foundation; U.S. Department of Treasury

Abstract

Tax refunds are an opportunity for lower-income house-

holds to accumulate emergency savings so they have

cash on hand to cover expenses when income is insuffi-

cient. Our field experiments testing different behavioral

interventions to encourage refund saving via online tax

filing show small effect sizes (0.12–0.14) and a low

aggregate savings rate (12%) that might be increased

were filers to receive financial incentives. We test a key

provision of the Refund to Rainy Day Saving and Finan-

cial Security Credit Acts using a survey experiment, find-

ing that hypothetical refund saving jumps from 16%

with no financial incentive, to 71% and 80% with 25%

and 50% matches, respectively, findings which are

mostly insensitive to refund size. Ourresults suggest that

public policies to provide greater financial support—

including stronger income supports—will better prepare

lower-income households for financial emergencies than

behavioral interventions to nudge refund saving.

KEYWORDS

lower-income, saving, tax refunds

Received: 15 January 2022 Revised: 22 September 2022 Accepted: 25 October 2022

DOI: 10.1111/joca.12498

This is an open access article under the terms of the Creative Commons Attribution License, which permits use, distrib ution and

reproduction in any medium, provided the original work is properly cited.

© 2022 The Authors. Journal of Consumer Affairs published by Wiley Periodicals LLC on behalf of American Council on Consumer

Interests.

J Consum Aff. 2023;57:245–263. wileyonlinelibrary.com/journal/joca 245

1|INTRODUCTION

Nearly half of US households and three-quarters of lower-income households lack emergency

savings to cover 3 months of household expenses (Lin et al., 2019). A growing interest in help-

ing consumers build emergency savings is reflected in efforts such as the $50 million Blackrock

Emergency Savings Initiative, the Consumer Financial Protection Bureau's “Start Small, Save

Up”initiative and the Compliance Assistance Sandbox Template for automatic enrollment in

workplace savings programs, and the AARP Policy Institute's Emergency Savings initiative.

The interest in this topic is warranted as emergency savings reduces risk for material hard-

ship (e.g., difficulty making rent payments; Gjertson, 2016), including in the aftermath of finan-

cial shocks (Despard, Grinstein-Weiss, et al., 2018; Despard, Guo, et al., 2018; McKernan

et al., 2009; Valdes & Mottola, 2021) such as job or income losses, which 24% of US households

experienced in the first several weeks of the COVID-19 pandemic (Despard, Grinstein-Weiss,

et al., 2020). Having emergency savings can also lessen demand for high-cost credit products

such as payday loans (Consumer Financial Protection Bureau, 2013; Despard et al., 2017) and

mitigate family stress (Rothwell & Han, 2010).

Lower-income consumers are less likely than higher-income consumers to have emergency

savings (Despard, Friedline, & Martin-West, 2020; Federal Deposit Insurance

Corporation, 2020) which renders them more vulnerable to financial shocks such as pandemic-

related job and income losses. To set aside money for emergencies, income needs to at least

occasionally exceed expenses (Barr, 2012; Mullainathan & Shafir, 2009). Yet lower-income

households are less able than higher-income households to cover their regular household

expenses (Lin et al., 2019), whereas the ability to cover expenses is associated with saving

behaviors and an increased likelihood of having emergency savings associated with saving

(Morduch & Siwicki, 2017; Pew Charitable Trusts, 2016) and the likelihood of having emer-

gency savings (Despard, Friedline, & Martin-West, 2020).

Bank account ownership also plays an important role. Rates of setting aside money for

emergencies were 66% and 26% among households with and without checking and/or savings

accounts, respectively (Federal Deposit Insurance Corporation, 2020) while savings account

ownership is associated with a 28% greater probability of having emergency savings, controlling

for age, income, and other household characteristics (Despard, Friedline, & Martin-West, 2020).

Yet 24% of U.S. households (Lin et al., 2019) and 29% of lower-income tax filers lack savings

accounts (Roll et al., 2018).

Receiving tax refunds is an opportunity for lower-income households to build emergency

savings (Jones, 2012; Rhine et al., 2006). Saved refunds can be drawn down to smooth consump-

tion in the months following tax filing and to help cope with income volatility (Morduch &

Siwicki, 2017), reducing risk for material hardships such as difficulty paying bills (Gallagher &

Sabat, 2017; Grinstein-Weiss et al., 2016). However, lower-income households experience other

challenges such as a lack of retirement savings, debt, and income volatility (Valdes &

Mottola, 2021), cash flow problems (Rothwell & Sultana, 2013) and expense shocks (Tach

et al., 2019). These households use their refunds not just to save but to catch up on rent and

other bills, reduce debt, and make large purchases (Barrow & McGranahan, 2000; Halpern-

Meekin et al., 2015; Shaefer et al., 2013; Sykes et al., 2015).

The fact that many low-income households opt to use their refund to catch up on past-due

bills or pay down debt they have accumulated throughout the year further indicates that a fun-

damental challenge for these households is that their incomes are too low to support both con-

sumption needs and savings. At the same time, these households may also struggle to save

246 DESPARD ET AL.