The reality of workers around the world has changed radically since the first social security schemes were developed in the 19th century. In Latin America and the Caribbean, where people now live much longer but typically save little for retirement, adapting pension systems to the current social, economic and demographic conditions is likely to become one of the greatest challenges countries will face in the future.
“Latin America and the Caribbean is one of the most unequal regions of the world. It’s also one of the regions that will age most rapidly. This is why we have to find new solutions to protect the most economically vulnerable. The convergence between new technologies and behavioral economics opens a potential avenue to deal with this social debt, which will become an urgent problem in coming years,” says Marcelo Cabrol, manager of the Social Sector at the Inter-American Development Bank.
For the past four years, the IDB’s Retirement Savings Laboratory has been experimenting with these novel technologies and the teachings from behavioral sciences, looking for innovative ways to help countries update their social security systems, which were created when younger workers far outnumbered pensioners.
One of the lab’s most recent experiments took place in Peru, where only 22% of workers save for retirement. It consisted in offering a voluntary savings plan to drivers for the ride-hailing service Cabify, based on the same application they use on their cell phones to manage rides. These platforms, which are disrupting the transportation sector in cities around the world, can also lead to higher rates of digital literacy.
“In developed countries, these applications can be seen as a threat from workers' point of view, because they can erode their rights. However, in developing countries such as Peru, they can be a great opportunity,” said Oswaldo Molina, a researcher at Universidad del Pacífico, which collaborated in the experiment.
DRIVE AND SAVE WITHOUT LEAVING THE APP
The voluntary savings plan gave drivers two alternatives: the ride-hailing app asked them whether they preferred to automatically save 2 percent of their weekly earnings or if they’d rather start saving only after their incomes passed a determined threshold.
“Drivers’ incomes vary widely. Some weeks they make very good money, others they don’t,” said Noelia Bernal, a professor at Universidad del Pacífico.
Encouraging the habit of saving for retirement would be the ultimate goal of such an experiment, but in this case, researchers also sought to address a more pressing need: as the COVID-19 crisis revealed, many if not most workers lack an adequate financial cushion to deal with economic emergencies. This need is particularly acute among the self-employed and those who toil in the informal economy.
The social security systems of the 21st century must recognize this reality and offer solutions that enable people to accumulate savings for unexpected events throughout their working lives while also building a nest egg for the longer term.
The results showed that, given a simple saving option and the right incentives, many workers are willing to act on to their best intentions. In the first month of the experiment, 18% of drivers signed up for the savings plan, making it one of the most successful interventions conducted by the Retirement Savings Laboratory.
“Whenever I have a ride, it automatically discounts 2% from the fare. That builds up over time and at the end of the month I get the accumulated total of all my trips via email,” said driver Wilmer Espinoza.
His colleague Freddy William Cruz agreed: "I saw it as very positive and I have been building up savings ever since I joined. Now my daughter uses that card for any emergency."
Brigitte Madrian, dean of the Brigham Young University School of Business and a leading researcher who has supported the lab, put it this way: “We know that many drivers have good intentions to save, but because it’s complicated and they’re impatient, it’s a decision they postpone. With this type of savings solutions, we try to help people to be constant and comply with the good intentions they have for themselves.”
INNOVATION TO PROMOTE PENSION SAVINGS
Since its launch in 2017, the Retirement Savings Laboratory of the IDB's Labor Markets Division, IDB Lab and the MetLife Foundation has done 16 experiments similar to this one, seeking to promote retirement savings among independent and low-income workers in Chile, Colombia, Mexico, and Peru. The lab has reached more than 1.5 million people through initiatives that seek to make the most of advances in technology and teachings of behavioral economics. You can learn more about the lab by visiting its website.
Download the free publication: Savings without barriers: Lessons from the interventions of the Retirement Savings Laboratory. (In Spanish).