How to Promote Retirement Savings for Low-Income and Independent Workers

How to Promote Retirement Savings for Low-Income and Independent Workers


Voluntary saving for retirement faces serious challenges in countries like Mexico, Colombia, and Peru. These countries have low pension system coverage, especially among for independent and low-income workers. For example, in Colombia, Peru, and Mexico, close to 80% of low-income workers do not contribute to pensions. The main reason for this disconnection from mandatory pension systems is that the vast majority of these workers are not formally employed. In Chile, less than 7% of pension system affiliates have made voluntary contributions, a percentage that drops to 3% for low-income affiliates. This situation underscores the need to diagnose and propose innovative and effective solutions to encourage retirement savings in these populations.


This study provides a comprehensive analysis combining primary sources—such as surveys and direct interviews—with secondary sources such as government reports and statistics from financial and pension institutions. In addition, it includes an analysis of a focus group conducted by Novaster in 2017 commissioned by the International Association of Pension Funds Supervision (AIOS) and the Inter-American Development Bank. The study focuses on identifying and understanding the main supply and demand barriers that limit the use of retirement savings products in Mexico, Colombia, and other Latin American countries. Demand barriers include factors such as insufficient or irregular income, behavioral biases, lack of financial education, and the absence of adequate savings products that meet workers' needs and preferences. Meanwhile, supply barriers include limitations on the development of long-term savings products for vulnerable populations. This multidimensional analysis is fundamental for formulating effective strategies to promote increased retirement savings and ultimately improve pension coverage for these groups.

Behavioral barriers

Barriers to pension savings manifest themselves in various forms depending on the presence of behavioral biases and cognitive limitations. Some of the most noteworthy include the following:

Present bias: Individuals tend to prioritize immediate needs and rewards over long-term benefits such as saving for retirement.

Social norms: These are the unwritten rules governing behavior within a society. Savings decisions can be influenced by social norms and expectations that often discourage long-term planning.

Optimism bias and lack of probabilistic analysis: Many people underestimate the risks of not saving enough for retirement, due to excessive optimism and a lack of proper understanding of future probabilities and risks.

Cognitive overload (from poverty): Individuals with limited resources often suffer from a greater cognitive burden when making financial decisions, which can negatively affect their ability to plan and save for retirement.

Status quo bias: A tendency to keep things as they are, which can result in a failure to act or change to more effective savings behaviors.

Loss aversion: This is a tendency to view the discomfort produced by a loss of a certain magnitude as greater than the well-being generated by an equivalent gain. This bias may lead people to prefer to maintain the status quo and not save for retirement, in order to avoid the negative consequences of actions with uncertain outcomes, perceiving savings as a possible immediate “loss” compared to uncertain future benefits.

Excerpts from the focus groups reveal that these behavioral barriers are common among low-income workers. Many say they have difficulty planning for the long term and a preference for meeting immediate needs rather than saving for the future.

Behavioral tools

To increase savings for old age, it is essential to address these cognitive biases and limitations through behavioral science-based interventions, namely:

Simplification: Reducing the number of options available—along with providing simple examples and clear advice—can facilitate savings decisions.

Reminders: Reminders, especially when sent at key times, can keep the focus on the task of saving.

Framing: Present information in a way that captures attention and encourages a positive attitude toward saving and aging. For example, using strategies like presenting savings as a gain (i.e., annual increases in income) can help counteract loss aversion bias.

Incentives: Implement small, tangible rewards in the present to offset the sense of sacrifice involved in saving.

Defaults: Defaults are the automatically preset courses of desired action and are effective when the individual making the decision does not change them. This tool is generally aimed at addressing cognitive overload or present bias, supported by our tendency to maintain the status quo.

These tools seek to use behavioral biases to encourage saving, rather than allowing them to hinder the retirement savings process.

Intervention design

Interventions can be designed to combine several of these behavioral tools aimed at increasing retirement savings among low-income and independent workers. They include the following:

Automatic enrollment in savings programs: Implements automatic enrollment as a default option that favors savings, simplifying the process and encouraging prior commitment. This strategy also helps reduce transaction costs by eliminating additional steps in the savings process.

Active choice and commitment devices: The aim is to promote tools that encourage prior commitment and create a clear and simple decision-making process, inviting workers to reflect on their future and reduce uncertainty and excessive optimism.

Simplify decisions: The aim is to reduce the complexity of financial decisions, especially in contexts perceived as complicated, in order to reduce the cognitive costs associated with decision making.

Simple reminders: Use periodic reminders to keep long-term savings as a priority in workers' daily lives.

Offer incentives such as targeted subsidies: Provide immediate incentives to minimize the sense of loss and, in some cases, offer a combination of liquidity tailored to the needs of independent and low-income earners.


The main challenges identified in the design and implementation of these interventions include the following:

Limited savings capacity: The low savings capacity of low-income workers, especially in contexts where their income barely covers their basic needs, poses an important challenge to encouraging voluntary pension savings.

Prioritizing immediate needs: Many independent and low-income workers prioritize other immediate needs over saving for retirement, which makes it difficult to promote a long-term savings culture.

Cultural perceptions and preferences: Personal preferences and cultural perceptions (social norms) can influence the decision not to save for retirement, as evidenced by the testimonies of the focus group participants.

Lack of liquidity of pension savings: The non-liquidity of pension savings and restrictions on early withdrawal reduce demand for these products among the independent and low-income workers.

Lack of trust in pension institutions: Distrust of institutions and the rule of law is widespread in Latin America, which has an impact on labor informality and the functioning of the mandatory savings pillar.

These challenges underscore the need to address both financial and structural barriers and the needs, preferences, and economic realities of independent and low-income workers when it comes to designing and implementing interventions to encourage retirement savings.


The study establishes that, along with structural and labor market challenges, barriers intrinsic to human nature play a significant role in the lack of retirement savings. The diagnostic identifies the behavioral barriers faced by the independent and low-income workers in Chile, Colombia, Mexico, and Peru in saving for retirement. These barriers include psychological biases such as preference for the present, valuing immediate needs over long-term savings, social norms, and optimism bias. The study suggests that the coverage and adequacy of pensions can be increased for the most excluded segments of the population through policies that include behavioral economics tools.

Policy implications

Implementation of behavioral tools and technological and financial innovation: To overcome the barriers associated with human psychology, the use of behavioral tools combined with technological and financial innovations is recommended. These solutions can be implemented immediately by regulators, employers, banks, pension fund managers, and Fintech companies, all at a relatively low cost.

Financial and pension education: Promoting financial and pension education is key to addressing lack of knowledge and the distrust of financial institutions. Education can help workers to better understand the importance of saving for retirement and have more trust in pension systems.

Adopting policies that use behavioral tools to promote savings: Public policies should be designed to strategically use behavioral economics tools to promote retirement savings. This includes simplifying the savings processes, using reminders, and introducing incentives that encourage workers to save.

These policy implications highlight the importance of addressing the behavioral barriers to retirement savings through strategies that combine behavioral economics, technological innovation, and education, along with introducing necessary structural reforms to pension systems and labor markets.