Autoescalation

What is autoescalation?

Autoescalation, also written auto escalation or automatic escalation, raises a contribution rate automatically according to a rule, such as a schedule or a pay increase. Joining a retirement plan and agreeing to later increases are separate decisions.

An automatic increase example

Suppose a plan starts contributions at 3% of pay, increases that rate by one percentage point each January, and stops increasing it at 8%. Someone who stays with the rule moves from 3% to 4%, then 5%, and eventually 8%. A move from 3% to 4% is a one-percentage-point increase, not a 1% increase in the amount contributed.

On unchanged gross pay of $4,000 a month, the contribution would rise from $120 to $160 a month at the first increase. That is $40 more going into the account. This is a hypothetical plan, with taxes and other deductions left out of the arithmetic; the effect on take-home pay depends on those details. A calendar rule can increase contributions even without a pay raise. A rule tied to a raise instead schedules the increase when pay rises and allocates some of that additional pay to saving.

Save More Tomorrow

Thaler and Benartzi’s Save More Tomorrow program invited employees to commit in advance to putting part of future salary increases into retirement saving. Their report describes the first three implementations and higher contribution rates among participants in the initial program.

Why the details matter

The early results came from implementations rather than a randomized comparison. They describe what happened in those programs, not a fixed effect every employer should expect.

Automatic increases can change contributions without requiring a fresh action each time. But a higher contribution rate is not the same measure as greater household wealth: borrowing and other saving can change too. Nor is the money costless just because it comes from a future raise.

Look at the increase rule, the ceiling, the information employees receive, and how easily they can change or stop it. Those terms determine what people are committing to.