I have previously written about American’s poor savings rates. Even the rich are only saving on average 12% of their income. The fact is that these poor habits are leading to a retirement crisis for millions of Americans. As such, there is at least one proposal out there to mitigate this by having the Government force us to save for retirement. Yes, more forced savings, on top of social security, and on top of the nudged (semi-forced) 401(k) savings that we already have. Since such a idea would have a significant financial impact on all of us, I thought it would be appropriate to review some pros and cons.
1. Secure retirement for many - The sad fact is that American’s poor retirement savings are going to come back and bite them down the road. If people thought about retirement more than a few years before actually retiring, there wouldn’t be that much of a problem. By forcing people to save, we ensure a the possibility of a much more secure retirement for many people.
2. Prevents the lack of retirement funds from becoming our collective problem - In all seriousness, what is going to happen when millions of seniors can’t make ends meet? Are they all going to go back to work? Maybe I’ll be able to work into my 70s or 80s, since I have an office job. But what about a construction worker with a high school education and a bad back? I suppose they could move in with their kids – assuming that they have kids and that they are on speaking terms. Maybe the government will have to raise our taxes or social security contributions to help out. I don’t know what will happen, but I do know that the retirement problem isn’t something that we can just write off. Forcing people to save more for retirement will help us avoid this disaster.
1. Massive market distortions - Working under the, probably wrong, assumption that the government won’t be stupid enough to have us put even more of our money into treasury bills, all that money will have to flow into some kind of financial security. I’d imagine the stock and markets. But with that much money flowing into those markets, they will become massively distorted in ways that I can’t even imagine.
2. Government has a poor history of handling money - Given that our government already replaced the money in the social security trust fund with treasury bills (currently yielding less than inflation) and then went on a rampant deficit spending spree, I question the ability of our government to oversee any large pile of money. That’s like letting a pack of hungry wolves manage a hen house. Bad idea.
3. There are many people who simply cannot save - People in the bottom two quintiles of income will have a very difficult time saving money (forced or otherwise). They’re stuck in the already bad position of needing to use most of their funds just to get by. I would argue that even the third income quintile could be hit pretty hard by this – imagine a family of 4 in a high cost of living city like San Francisco or New York.
4. Instant recession - All that savings has to come from somewhere. It will come come out of consumer spending. In order for these new retirement accounts to have any meaningful impact they will probably have to require a 10%-15% contribution. If that much money is ripped out of consumer spending a recession is a guarantee. I would hope that our government would be wise enough to phase this in over time, say 1%/year to let people and the economy adjust accordingly.
5. This is one more way (*) of chaining people to jobs they don’t want - I am rather sympathetic to the desires of the early retirement community, as I have worked in many crappy jobs. The more of your money that the Government rips out of your hands the less you have to invest in your own education, entrepreneurial endeavors, or investments targeted towards financial independence.
6. Continued ambivalence towards existing savings options - There are so many savings options out there it’s almost nauseating. Not to mention, confusing. You can save your money in taxable accounts. You can save your money in tax deferred 401(k) plans. And you can save your money in tax deferred IRAs. 401(k)s and IRAs also come in traditional and Roth flavors. Then there are health savings accounts (HSA), and 529 accounts for college. With retirement savings now forced, people can continue to blissfully ignore ignore their other retirement options. Or, perhaps they’ll even stop being lazy and start opting out of 401(k) savings to free up additional spending money.
1. Improved financial education - When I went to school there was no personal finance class. No one taught me about how to make a budget or invest in stocks. My parents raised me to be frugal, but my financial education at home basically ended at that. Perhaps we should work to educate people about personal finance before we start forcing people to save more. As mentioned above, we already have a nauseatingly large amount of savings vehicles, and with proper education people might make better use of them.
2. Link status to savings - One reason people spend all of their money is the unending game of keep up with the Joneses (which is unwinnable, by the way). Unfortunately, driving an Escalade (a depreciating asset) means more to people than having an Escalade’s worth of money in your account (an appreciating asset). If there was some way to reverse this, or even just diminish it, savings might start increasing.
(*) The other way that traps people in jobs they don’t want is health insurance. Unless you are young, healthy, and male, you’re going to have a hard time in the private market. Only time will tell if Obamacare changes this for the better. Personally, I’m hoping that it does lead to much more reasonable health insurance prices in the private market.
Readers: What’s your opinion? Good idea or bad idea? Do you see any additional pros or cons that I missed? Would you suggest any alternatives?