While April 15th is generally referred to as “tax day,” that’s true for less than 20 percent of filers. For most working households tax day falls in February or early March. It’s the day when they receive their refunds, not when they file.

More than 80 percent of filers making less than $50,000 a year get a refund. Those refunds are more than $2,000 on average. There’s a lot of handwringing over those figures: Financial advisers urge people not to give the government an interest-free loan, and instead reduce their withholding and set-up an automatic savings plan. (It’s worth noting that many low-income households couldn’t follow that advice even if they wanted to, because they don’t have access to free savings accounts, ore ven to jobs that offer steady pay and automatic savings options.) Meanwhile, social service agencies run programs that encourage households to put their refunds into long-term savings and rainy day funds. They worry that the households are missing a chance to build assets and economic stability. That’s a legitimate concern when 60 percent of households have less than three months of liquid savings, and emergencies like a vehicle breaking down, a job loss, or an unexpected cut in hours is likely. But neither the financial advisers nor the social service agencies have had much luck changing behavior, based on historical IRS data and surveys of household emergency savings.

Thinking about tax withholding and refunds in a different light suggests a course of action that may be more likely to help lower-income households improve their financial situation. Overwithholding—choosing to withhold more than you will owe to get a refund—is a wildly successful savings program.

Over the last decade, behavioral science researchers have shed light on why it is so hard to save despite good intentions and how we can stack the deck in savers’ favor. One of the outcomes of that work is the value of a “commitment savings” account. These are savings accounts that people voluntarily open, but cannot access until they accumulate a certain amount or reach a specific future date. It provides all the benefits of accumulating a big chunk of cash without any of the painful and exhausting daily resistance to temptation.

This is exactly what the US tax system provides. The IRS is running the world’s largest and most successful commitment savings program for low-income households. What other program can boast of 80 percent participation of people below median income and average savings of 4 percent of income (the average savings rate in the United States over the last 25 years across all income groups is 5.5 percent)? The amount of savings in the tax system is likely larger, because these figures include only federal, not state, refunds. In the US Financial Diaries, which closely tracked the financial lives of 235 low- and moderate-income American households for a year, nearly half of our households received refunds of 8 percent or more of their annual income. Yes, a large portion of these sums is a result of the Earned Income Tax Credit (EITC), but even when people could claim EITC payments throughout the year, almost no one did, instead preferring to keep their “tax savings account” growing all year. We should start celebrating the large amount of savings that households are doing through the tax system rather than fretting that they are not saving their savings.

Of course, there is also a concern that people are “blowing” their refunds when they get them. An initial analysis of the US Financial Diaries data suggests that lower-income households are most often using their refunds to pay down debt, buy clothes, and eat out—hardly a vice for people who are stretching grocery budgets to the max much of the year while we tightly restrict what foods they can buy using food stamps. A different research effort led by sociologist Kathy Edin, which followed 100 families for six months after receiving their tax refund/credit, found largely the same thing. So have national surveys.

If we think of tax refunds as savings in the first place, it’s easy to understand why households are reluctant to put that lump of cash they have been building up all year into another, longer-term savings account. Instead, we can focus efforts on helping people become better spenders of their short-term savings: what debt to pay down, what to spend on to reduce the likelihood of future emergencies, figuring out the best down payment amount on a vehicle purchase or what repairs are likely to pay off. There’s tremendous room for innovation around payday loan alternatives or pre-payment for future needs—another strategy uncovered by behavioral science that works much better than general savings. If interest rates go back to the levels in the 1980s, the IRS commitment savings program would be a costly one. But for now, instead of focusing on the long-term savings that low-income households aren’t doing, let’s start by building on their already successful saving strategy.

Read more stories by Timothy Ogden.

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