3 Reasons Saving For Retirement Should Be Legally Mandatory
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.
- 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.
- 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.
- 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.