3 Reasons Saving For Retirement Should Be Legally Mandatory

2013 March 11
by Kyle Bumpus
from → Commentary, Economy

I’m going to start off this post with what seems to me an obvious given: the retirement system in this country is broken. Social security is all well and good, but the do-it-yourself retirement savings experiment has been an abysmal failure. 401k plans have been co-opted by the financial services industry for their own benefit and Americans as a group don’t save nearly enough in them as they need to, anyway. Frankly, at this point we’d be better off without them.

How To Solve This Problem?

I don’t see a return to the pension era. Pensions are expensive and let’s face it, most companies just can’t afford them in the era of globalization (despite what many union bosses would claim). Back when the US dominated global industry and American companies had ample pricing power, profits were high enough to support generous employee retirement benefits. No more. Workers are going to have to shoulder the burden of providing for themselves in retirement whether they like it or not.

Unfortunately, workers just aren’t equipped to do so. They consistently under-save. Almost as bad, the tend to mis-allocate what they do save. While a Social Security-style defined benefit system has its place, it isn’t really a scalable solution. That is, we couldn’t afford to simply expand social security to cover more of the average consumer’s retirement income needs because it can’t be invested in marketable securities other than treasury bonds. That means slow growth and unfortunately, allowing the Social Security system to invest in the securities of publicly traded companies would be too big a conflict of interest.

We Should Force People To Save

The obvious solution? Force people to save. It’s not as controversial as you might think at first. We already do it, after all. What else is Social Security but forced savings? Several nations have enforced such policies at some point in their existence to varying levels of success. Singapore still does to this day. While I think a 36% forced savings rate is more than a little obsessive and wouldn’t scale in the US,  something like a 5-6% forced savings rate would. Invested moderately in something like the TSP target retirement funds (which would be expanded to allow all citizens access and is relatively immune to Wall Street profiteering), this would go along way towards bridging the retirement income gap in conjunction with Social Security in its current form.

There are plenty of issues to work out, but the solution is workable. There would probably need to be some moderate system of tax credits for very low-income taxpayers to compensate them for the corresponding reduction in take-home pay, but practically everybody would benefit from this program. The rich would love it because it would allow them to defer even more income than they otherwise would be able to. The poor will love it because it’s a painless way (after tax adjustments) for them to save for their future.

3 Reasons Saving For Retirement Should Be Legally Mandated

There are three primary reasons this is a vastly better solution than our current system.

  1. It’s automatic, tax-efficient, and frictionless – One of the main knocks against 401k plans is that they’re too complicated. When faced with too many competing options for their retirement cash, some people just give up and don’t do anything. Automatic-enrollment has mitigated this somewhat, but plenty of plans don’t have automatic enrollment and if they do, the default investment is often a stable value fund. Besides, even if you are automatically-enrolled in one 401k, you won’t necessarily be auto-enrolled which you switch jobs. And you’ve got an orphan 401k just sitting there, to boot. No wonder so many people cash out their 401k when they change jobs. It’s just easier.
  2. It’s cheaper – Wall Street makes a fortune ripping off 401k investors. If I can invest as little as $1,000 with Vanguard and gain access to excellent funds with rock-bottom fees, why can’t I do the same in a 401k plan with millions of dollars in assets? It doesn’t make any sense. Expanding the TSP program to all Americans and mandating employees invest 5% of their income in it would lead to incredible economies of scale. The average American would be able to invest in quality, well-diversified mutual funds with expense ratios only huge institutions with tens of millions of dollars to invest currently have access to. That’s a win-win for everybody: except Wall Street.
  3. Financial literacy has failed – People don’t need to be told they should save for retirement. They know that. Telling them not saving will make them poor isn’t going to make them more likely to save in the same way telling an overweight person eating double cheeseburgers at every meal will make them fat won’t cause them to stop eating double cheeseburgers: they already know it’s bad for them, but they do it anyway. We need to influence people to change their behavior: merely educating them isn’t enough. And what better way to influence somebody to change their behavior than to legally mandate them to do what they should have the will-power to do on their own (but obviously don’t)? It seems authoritarian and “anti-American,” but honestly, I think we’re running out of choices.

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16 Responses
  1. 2013 March 13
    Ethan permalink

    If you place no value on individual freedom of action, then give your own up. Leave mine alone.

  2. 2013 March 13

    Your reaction doesn’t make any sense. We all have to act collectively to make an impact. My suggestion is entirely appropriate and justifiable within the context of a free market capitalist system and doesn’t involve giving up any individual freedom of action at all.

  3. 2013 March 13
    Ethan permalink

    We do not have to act collectively to make an impact, your suggestion proposes the opposite of a free market, and deciding what to do with the product of my labor is an individual freedom of action you propose to deny me. We aren’t out of choices – we have the option of leaving people alone to make and live with their own decisions.

  4. 2013 March 13
    Ethan permalink

    Sorry for not being very constructive, here. I am only commenting because I respect your financial commentary and I care about what you think—ordinarily I would just browse away from statements like this. I’m not responding very constructively because I’m flabbergasted that you hold this position and that you don’t seem to understand (or fear) the principles it assumes. Of course, we crossed over that line so far back that we can’t even see it in the distance anymore… you are correct that there’s nothing new in this, nothing meaningfully different or worse than Social Security. As a replacement it would be an improvement.

  5. 2013 March 13

    Actually, it’s not the opposite of a free market. Free market does NOT mean free to do whatever you want. It means free to do whatever you want SO LONG AS IT DOESN’T INJURE ANYBODY ELSE. You not saving for retirement injures others; therefore, you are not guaranteed the right to do so under a free market capitalist system. In a free market system, all transactions are kosher so long as the involved parties pay 100% of the costs involved. That doesn’t apply to social issues like this, since if you don’t save, the taxpayers will have to bail you out in some way. That justifies government intervention in free market ideology. Not only does it justify government intervention, it actually demands it. To not do so would be anti-free market. A more obvious example is pollution: when a company pollutes, everybody in the community pays the cost of the pollution, not just the company doing the polluting. A free market system would require the government to step in and either stop the pollution or impose some sort of financial burden on the offender. Same principle is at play here. Since the consequences of your actions don’t just affect you, the government is required to step in and force you to pay the full cost for your choices. Refusing to save for retirement and then having me bail you out (even if it’s not a law, it will still happen implicitly) is logically equivalent to a company polluting a community’s water supply and not paying to clean it up.

  6. 2013 March 14

    This seems like a lot of administration. Could the same thing be accomplished through increased payroll taxes and a sovereign wealth fund? Or is it important in this scheme that there be a direct line of sight between what someone puts in and what they take out?

  7. 2013 March 14

    I think a sovereign wealth fund is a viable option, although I’m not sure how well it would scale for a country as large as the US. My guess is it would end up owning a ton of foreign government bonds. Politically, though, I don’t see how that would ever get through congress.

  8. 2013 March 15

    Kyle,

    Interesting article. I certainly agree with your points about people not saving enough and Wall Street corrupting what savings we do have. However, I take the opposite approach to yours. I think we need less government persuasion and involvement, including a safety net. Too many people believe that social security will provide a retirement even though the press often talks about how one can’t live on it alone. I think having what is seen as a security blanket negatively influences saving behaviors in this country. Despite being a communist nation, China has zero safety nets, which is why the citizens save 30-40% of their earnings. When no safety net is present, people will naturally build one. It is human instinct to take care of oneself. If we are delusional and believe the state is there to do this for us, we won’t save (and we will be sorely disappointed as the impending SS shortfall will prove).

    Singapore has had success forcing citizens to save, but they don’t really have freedom. Singapore is merciless on its citizens for failure to obey, and the country has even gone as far as seriously penalizing women who have more than 2 children. This is not freedom. I agree with Ethan’s point there.

    You are stretching a bit and sound like many politicians when you say that you are not violating freedom by mandating savings. Politicians often use the “harmful to society” claim to mandate human behavior. Bloomberg tried to do it with soda bans in NYC. Sure, obesity is an issue, but telling people what they can and can’t drink is a restriction on freedom. If we let the government control our actions based on the “harmful to society” benchmark, they will control our diet, our entertainment, our life’s work, etc. In other words, we would be controlled by whomever has power at the time.

    I do agree with you that irresponsible behavior harms those that act responsibly in that those who don’t save get bailed out with welfare or other means. This comes back to my point about getting rid of, or making temporary, the safety net. Welfare should be a short term solution, and those who don’t save should face economic hardships. Many will claim it is cruel, but if the safety net disappears, savings rates will rise.

  9. 2013 March 15

    The “safety net discourages savings” and “lack of a safety net encourages savings” idea really doesn’t mesh with reality. Yes, China has a pretty good savings rate and very little in the way of a safety net, but MANY other nations with safety nets far larger than in the US save at a much higher rate than us. In fact, comprehensive studies of the global correlation between savings rates and social safety nets find no real relationship in either direction (with correlations fluctuating between about -0.2 and +0.2). I do not believe this is a good argument for eliminating safety nets. I have spent time in China and based on my own observations, I do not believe lack of a safety net is the primary people reason save. That’s just my opinion.

    http://www.carnegieendowment.org/2013/03/07/does-china-need-social-safety-net/fow8
    http://www.adbi.org/files/book.effects.social.policy.annual.conference.2009.chapter.4.pdf

  10. 2013 March 16

    I agree the bad 401(k)s are pretty bad. On the other hand, there are those that come with bragging rights. Mine came with a dollar for dollar match to the first 5%, and a .05% expense on its S&P fund. 40 years of fees add to 2%. Nowhere near the 1%+ expenses many come with.
    I agree with you, and think about 8% is the way to go.

  11. 2013 March 17

    I’d much rather have self-directed (forced) retirement savings (that we can invest and allocate ourselves) rather than have Social Security, which is a form of forced retirement savings that doesn’t perform as well as investments that I could make on my own.

    Yes, I understand that SS is more than just a “retirement” account, it’s also a form of disability insurance …. but without getting into a political debate about SS, I’d just like to say that I’d much rather have flexibility and options when it comes to my own retirement.

  12. 2013 March 19
    Ethan permalink

    I don’t believe that society, or people individually, are obligated to actively provide care to one another. I think that we often choose to and that this can be a wonderful thing, but I don’t believe we have an enforceable obligation to do so. So society does have an alternative to paying for my retirement, which is to not do it. As Kirk points out, this does not result in some kind of social disaster. It results in much more individual planning, in a variety of private safety nets, and in greater family dependence (and cohesion) across generations.

    I disagree that anyone can have a claim on the body or labor of another, without that person’s individual consent. I can’t find a philosophical difference between such claims, and the claims of a master over a slave. The concept of “tacit consent,” whereby I am said to consent to whatever the majority legislates in the U.S. simply because I was born here and haven’t moved thousands of miles and changed careers and languages to get away, is far too flimsy a justification on which to hang significant impositions.

    In short, I agree with the maxim: “In a free society the state does not administer the affairs of men. It administers justice among men who conduct their own affairs.” And I don’t believe that this undervalues individuals – I believe it values them far higher than do the alternatives. I hope that, if you are not swayed yourself, you will at least understand that there are many people out there in the world who don’t share your beliefs and don’t want you, or any conglomeration of people, anywhere near the fruits of their labor. Please leave us alone, except for on a voluntary basis. Then you at least have to compete for the best solution. Would that government solutions were subject to such a mechanism!

  13. 2013 April 12

    I completely agree with your forced savings for retirement idea. The reason I feel the need is there are many people I have contact with every single day that feel they “can’t afford” to save for retirement when I feel that they can’t afford not to. Everyone is going to have to retire some day whether they want to or not. What will happen to those who fail to prepare? Society will be forced to take care of them (even if it is just the basic needs) through our tax dollars.

    Also I like the idea alot better than Social Security if we are left control of our investments. I am young so with Social Security I feel as if I’m paying in and will get no reward when I’m ready to retire in 30 years or so. I would much rather prefer to have that few percent to put into my retirement plan so that I can have control over how it is invested.

  14. 2013 April 26

    So we should dump money into another bottomless pit of FIAT currency so the Federal Reserve can laugh out even louder at the serfs
    Please leave me alone. I am not asking or a penny from you and neither should you from me. If you want to save money, go ahead. This is just another globalist scam to rip off the worker who already has been hurt enough by our corporocrats.

  15. 2013 April 26

    Hmmm, if FIAT currencies are worthless, why would those in charge want to rip you off just to obtain fiat currency? That’s not a very good scam, is it? In reality, neither I nor anybody else is asking for a penny from you. I just want you to save your own money so I don’t have to bail you out when you’re 80.

  16. 2013 June 11

    Although I do think that people should ALWAYS save having government involved in forced savings would require more oversight and administration. It wouldn’t solve the fundamental culture of spending we have in this country. Creating tax incentives to help people save only impact those who have the extra funds.

    401ks are great savings vehicles but it isn’t offered to everyone. Some companies do automatic enrollments which I think is great.

    The overall solution in my mind is to address the culture of spending and build a culture of savings.

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