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My FI Journey » Reflections, Retirement » Should Americans Be Forced to Save For Retirement?

Should Americans Be Forced to Save For Retirement?

Swimming poolI 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.

Potential benefits

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.

Potential problems

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.

Alternatives

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?

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57 Responses to "Should Americans Be Forced to Save For Retirement?"

  1. Headed Home says:

    Yeah, this is a problem. Forcing savings (or anything) is a bad idea, but I’m 100% for better education of our youth. Simple stories can really make a difference. My first finance class in college, the professor said the only thing he wanted us to take away is that saving $6/day (the cost of a fast food meal) for 30 years would give you $500k. Just the power of small savings adds up. Kids need firm examples like this – with big numbers coming out of small savings over time.

    1. I had no formal personal finance education. I just kind of pieced together what I learned from my parents and what I learned through self study. So basically I fumbled my way to where I am now.

    2. I don’t agree with the government forcing us to save either. The more mandates that are enacted, the more freedoms we lose. There is a safety net in place, so we at least have a minimum that people have to live if they are not responsible.

  2. I’ve been saying it for a while now, I wish they taught financial education in up through high school, and maybe even make it a mandatory elective in college. The problem with parent-to-child financial education is that they may not actually know enough to impart good knowledge to their kids.

    If the kids end up being good with money, then the problem is solved. Who cares if social security is almost drained by the time they grow up? At that point it should only be for those that actually need it.

    1. I agree, a financial education course would have been great in high school or college. I had economics courses, but no personal finance course. Talk about putting the cart before he horse.

      Parents might also be money savvy, but not really think it’s important to teach. I think my parents at least knew the basics about money, but they didn’t teach me much. Being frugal, staying out of debt, and other lifestyle issues I picked up from them. But not much about saving, investing, etc.

    2. Mr. 1500 says:

      Yeah, completely agree. Financial education in the US is non-existent; at least it was when I went to school. Money is also a taboo subject with most families. I don’t think most parents discuss it with their kids. Finally, if your parents are horrible with money, combine those role models with a lack of education and you have a recipe for disaster.

      1. Mr. 1500 says:

        Also, my parents were not good with money. By age 62, they had saved 25K and had 14 years to go on their mortgage. Bad bad bad. In their case though, my dad’s pension saved their asses.

        I wonder what will become of the current generation of non-savers who don’t have pensions to fall back on? Hopefully Wal-Mart will need a lot of greeters.

        1. Mr. 1500,

          Thanks for stopping by.

          I’ve been reading that a working is the new retirement. I find this perplexing, but with a near zero savings rate I don’t see how people are going to get away from working into retirement. Like I said, for those of us with office jobs, it may not be optimal, but it’s doable. What about construction workers with bad backs? Wal-mart might be the only place for them.

          1. Amy K says:

            The gentleman who sold us our last car was a former construction worker who developed a bad back. Not that all construction workers can become car salesmen in their golden years, but your question made me smile because I knew at least one person who had answered that question with a job better than Walmart. He’s also a self-published author of children’s books.

      2. We didn’t really talk about money when I grew up. Never carry credit card debt was probably about the only financial axiom that was ever “taught” at my house. When I finally got to start reading about personal finance, it was almost magical. But looking back, almost everything that seemed profound at the time (budgets, emergency funds, etc) was all stuff that could have easily been taught at home.

  3. Anything “forced” seems like a bad idea, BUT I am all for automatic enrollment in 401k (or IRA if there is a way) with the option that they have to fill out paperwork to un-enroll. Most people don’t bother to look up 401k and fill out the paperwork. If the situation is reversed, I am sure most people won’t bother filling out the paperwork to un-enroll the 401k. It is sort of forced savings, but not at the same time, they can get out if they want.

    I am going back and forth on the financial education part. I believe financial education will help but not make that much impact unless they are being practised, which means the impactful education has to come from parents who “show” how it is done, not “say” how it is done.

    1. I have a lot of problems with “forced” anything as well as government programs.

      The three main government retirement programs, Social security, IRAs and the 401k system are all pretty weak. Social security is headed to bankruptcy and produces laughable returns even when solvent. IRAs, while being the best of the lot, have no employer match and have very limited caps. The 401K system, outside of the match, is nothing but a vehicle for companies like Fidelity and Vanguard to make a killing on mutual fund fees.

      I wish they would merge the 401k and IRA. Just send the employer match to my brokerage account. That would be great.

      On the topic of education, there’s two kinds. Lifestyle education: don’t get into debt, pay your bills on time, don’t buy crap, etc. Then there’s technical/practical education: how to screen stocks, what’s a mutual fund, how debt works, etc.

      School can teach the latter, parents have to supply the former. But they both need to be there in order for people to have a comfortable retirement.

  4. Brian says:

    I am torn on this issue. On the one hand I don’t like being forced into anything, especially by the government. If the did force this program I would prefer it was managed by the private sector (let 3 -4 discount brokerages be allowed to be the custodians).
    On the other hand, forcing people to save would do them some good. They already have to do it with Social Security. Maybe this could be the reform that system needs?

    I think you did a great job outlining the pros/cons. In the end I would probably be against forced savings.

    1. I’m torn as well. I would personally be far worse off in my goal to achieve financial independence if more of my money got forced into retirement accounts. But society as a whole might be better off if people had a savings rate more in line with what they actually need.

      It’s pretty sad when most “retirement” articles I read are discussing how work is the new retirement.

  5. My Fi,

    Count me in among the people that don’t understand this.

    SS is already a forced savings plan that’s being mismanaged away.

    We’re forced to give 6.2% of our income away, along with our employers 6.2% match, for retirement through Social Security. Wouldn’t simply increasing this percentage to allow a more comfortable lifestyle in retirement be the appropriate solution…or perhaps a better management by the powers that be with the money they’re already receiving? Why would I want the government to handle any more of my money when they seem to have a hard time with the 12.4% they already receive from my income?

    This definitely does not sound like a good idea to me. And this comes from a person who wholeheartedly believes in saving and its benefits.

    Best wishes!

    1. It seems like it’s a necessary idea given how poor the savings rate in the US is. But I have a hard time believing that the government could possibly run it well.

      I would love to have the 12.4% of my income sponged off by Social Security deposited in my brokerage account instead. I’m pretty sure I could beat the social security returns. But then again, given how well Social Security is doing, so could my cat.

  6. Martin says:

    More government? Forget it! Never! This never brings anything good. Any government control or push has ever been for good. This will bring more corruption and less benefits. You know what I believe in? Look at your grandparents. Were they able to retire comfortably? In most cases yes. Many Americans who lived during WWII and shortly after retired with nice pensions. They were saving enough and companies had fully funded pension plans. How come, we do not have it anymore? Because people today are accustomed to too overly gracious social programs. There is very little to force them thinking how to secure their retirement. Something unthinkable to our grandparents. Many people live the way say why trying now when the government will help us. If there was no helping government, these people would either bankrupt or die or start living frugally withing their means and relying on themselves and striving to get better. A bigger government won’t solve it. It will make it worse. And I speak from my own experience, since I lived in a post-communist country, where all this you are proposing is already applied. It doesn’t work.

    1. I would tend to agree with you that it’s a bad idea. Especially given the government’s track record for handling retirement programs.

      On the other hand I don’t have a good answer about what to do when a bunch of seniors start retiring with nowhere near enough savings.

      1. Martin says:

        Well, then I am sorry for those seniors. They have to rely on SS, charity, and possibly a support from their kids. Maybe that would be a great influence to their grand kids not to repeat the same mistake when they are young. If you enable the future seniors not to take their life seriously, sorry, they have to pay for it. Nothing in the world is for free and shouldn’t be. Let’s look at another example. In many European countries colleges are for “free”, student do not pay any tuition (it is paid via taxes paid by the whole nation, even those who won’t go and never studied a college). What makes student taking their studies seriously then? Nothing. So many of them are at school only to have free time, drinking in restaurants in parties, “studying” (I should say attending) school they would never apply for in the first place and when they finish, they have very little academic knowledge and no applicable field knowledge. In other words they are as stupid as they were prior to starting the school. Do you want that? I don’t because this socialistic methods plant and grow those future seniors.

        1. I tend to be very leery of socialism, especially given our Government’s track record with handling large programs.

          That’s an interesting observation about college students in Europe. I went to college and grad school in the US, so I can’t really comment on that, but US students certainly do their fair share of partying and slacking off even though they are paying through the nose for college.

          On the other hand, I do have a lot of experience working with PhD and Masters holders from Europe, and most are not nearly as well trained as their American counterparts.

  7. I do believe in social security. It is basically forced retirement. Let’s face it. People are terrible at saving. If they weren’t forced to save for social security, millions of people would be out on the streets every year. I think it’s an unnecessary evil.

    1. Social security does seem to be a necessary evil. I’m not very comfortable with the idea of even more forced retirement, especially given the track record with Social Security.

  8. I don’t like the idea of forcing people to save. We have something similar in Australia called superannuation and 10% of my pay is taken each week and put into a fund that I can’t touch until I am 65. I really pisses me off as I would be far better off having that money in my home loan than losing money in this stupid fund.

    1. Social Security here amounts to 12.4% (half from the employee and half from the employer) of our gross pay. You can’t imagine how much I wish I had 12.4% additional money deposited in my brokerage account. I’d certainly get better returns than social security.

  9. I am torn on the idea. While it has a great intention, any time the government steps in and “forces” us to do something it’s a sure sign for an upcoming boondoggle. The saving/investing rates are wretched in general and things do need to change. I like your #1 under alternatives as it is sorely missing. I did not receive much of this and think it’s still lacking. If we were to teach basics like simple budgeting, balancing a checkbook, saving, etc I think that would go a long way to help future generations.

    1. It’s odd to me that we seem to be drifting in a direction where neither schools nor parents teach the basics of how to live any more. Whether it’s how to balance a checkbook or how to cook dinner, these skill sets are not being communicated to the younger generation as much as they were when my parents or grandparents were children.

      In terms of personal finance, simple concepts like pay off your credit card in full every month, and save 10% of your income, would go a long way towards solving many of our problems.

  10. Integrator says:

    In Australia, its government mandated that employers contribute 6% of annual salary toward a retirement account, with employees able to match up to that level (sort of a compulsory 401k for all employees). Employees get to choose in what fund they contribute that money toward. I think this is probably the closest model that i could imagine to forcing someone to do something for retirement.

    1. If they wanted to replace social security with private accounts, I’d be okay with that. But I’m not really comfortable with the idea of additional forced retirement savings.

  11. Something needs to be done. I’d hate for the government to have control of the money though. Look how they ruined social security and made it a piggy bank instead of using for its intended purpose.
    I fear that with a lack of pensions and with social security uncertain, my generation is going to have a major wake up call way too late.

    1. I tend to agree that something has to be done. But I have a hard time imagining the government doing anything well. Their track record is just abysmal.

      Our generation is going to have a serious wake up call. But the reality might not be that stark. It’s possible that our generation just has boring lackluster retirements. Mostly sitting around in a small apartment watching daytime TV. There is certainly enough money in the system to fund that. No exciting trips to Europe, deluxe country club memberships, or world cruises.

  12. I’m torn on the topic. I don’t think additional retirement savings should be government mandated, but I do like that more and more companies are automatically enrolling employees in 401k’s. More people just need to step up and make their future more of a priority!

    1. The automatic 401k enrollment is a good idea. I’m a big fan of enrolling up to the match. If you’re company has a 6% match and you are auto enrolled, that’s essentially a 12% savings rate. Which isn’t bad by current standards. Even if it’s dumped into some overpriced fund, it’s still way better than before.

  13. 101 Centavos says:

    That’s the problem with having authority “force” anything on you. Eventually, it has to be “enforced”.

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  17. I would disagree that Americans are poor savers – we are paying a lot of taxes, hence there is Social Security.

    We do have huge homes. There is potential to downsize and use that money to live off during retirements.

    Americans are free nation – we can always move to Honduras and live happily and content on $1,000 a month there.

    1. MFIJ says:

      American’s poor savings rate is pretty well known and a lot of economics wonks are talking about how to improve it. That’s why 401ks are now opt-out rather than opt-in and why it’s even been proposed that Americans be forced to save for retirement.

      Downsizing homes was part of the pre-recession retirement plan. But with home prices no longer skyrocketing in most areas of the country, it’s unlikely that this is a viable option.

      Moving to Honduras is an interesting idea. But I don’t think it’s viable for everyone, particularly people who want to be around their family and friends in retirement.

  18. Dan Mac says:

    Personally I think it would be a good idea to force people to save for their own inevitable retirements. However, I personally want to maintain control of where I invest my money (but there are many people without the knowledge to properly do this).

    I think it was a bad move for retirement when companies began phasing out their pensions in favor of 401k’s. The problem is Americans have shown they are short term thinkers and don’t think far enough ahead to save for retirement. It was better when companies would do this for them. The other problem is most people lack the knowledge to properly invest. Many sold out when stocks were plummeting near their bottom when in fact they should have been buying as many shares as they could at the time.

    I like the idea of linking social status with savings. Unfortunately it’s seen as bragging if you walk around telling everyone you have managed to accumulate a large amount of money in the stock market on a small salary.

    1. MFIJ says:

      Forcing retirement savings seems like a good idea, but I have considerably little confidence that our government could pull something off that actually worked.

      There’s really no difference in saying that you have $5000 invested in the stock market or that you bought $5000 spinning rims for your $4000 car. Either way, you spent $5000. But sadly, society looks on the appreciating asset less favorably than the depreciating one. I don’t see this changing, but I will continue to dream.

  19. I want the government to stay out of this. What have they ever done to show that they could manage this and not “borrow with IOU’s” like the SS system. I’m okay with the SS system, but further withholding from our paychecks being mandatory leaves me with less money in my pocket now and most likely in the future thanks to the governments’ incompetence. They already take 6.2% of my income plus the 6.2% from my employer. I’d gladly opt out of SS if that was an option, and it’d be even better if I could have the employer contribution added to my paycheck.

    I understand the logic behind this because as a nation we typically don’t think past tomorrow let alone 30 years down the road. I prefer the recent legislation saying that employer’s could make the 401k an opt out and not an opt in upon employment. If I remember correctly the employer can also have an auto-escalation up to a certain percent. By making it an opt out you’re forcing a new employee to have to do something to stop the contribution instead of start it. Inertia is a funny thing.

    1. MFIJ says:

      I would opt out of social security in a heart beat, especially if I could get my full 12.4% back.

      I’ve been relatively unimpressed with all of the government’s ideas for retirement (SS, IRA, 401k) and really don’t want them to create another program.

      On the other hand I do like the opt out for the 401k. I think that’s a policy that makes the existing programs work better, rather than adding another layer of bureaucracy to things.

  20. Jeff says:

    I don’t think we should be forced to save for retirement. Unfortunately in the present system, those who are responsible will be paying for those who are not responsible. Saving will always be something most people will fail to do because living in the present is easier than planning for the future. Hoping things may someday change.

    1. MFIJ says:

      I understand the rationale for forcing people to save for retirement, but I don’t care much for the whole “forcing” aspect of it. Especially since social security is already forced savings of a kind, and I can’t say that’s working out very well.

  21. I am in the camp that thinks they should mandate or have some minimum participation. They already make us do it with Social Security. The beauty is that if its a 401k it will be your own. When left to their own devices, our society has demonstrated extremely poor savings efforts. I’d love to promote financial education to get people more interested, but to some extent I don’t think it will be enough to really motivate the majority of people to do a better job.

    1. MFIJ says:

      If we had forced savings, I word prefer it to be in an IRA style account. 401k’s are really nothing more than cash cows for companies like Fidelity and Vanguard, which get to make money hand over fist by skimming fees off of your account for decades.

  22. steve says:

    I do not agree that we should force people to save for retirement — that is what Social Security is, a forced saving program.

    I am not sure that the school system should teach mandatory money classes. If there were a way to link math, tech and financial mastery, then classes would make sense.

    To me, money education begins at home. Take responsibility for the money teachings at home through conversations and through examples. My father and my maternal grandfather worked hard, saved regularly, and educated all of us in the basics of money management (spend less than you earn and invest the rest).

    I have two kids at home who have everything they need, and most of what they want. They watch our every money move, and they know that we work hard, save regularly, and educate them in the basics of money management.

    1. MFIJ says:

      I certainly inherited my parent’s spending habits – by which I mean having a general aversion to spending money on things other than the essentials. Everything I know about investing and financial independence, I learned on my own. It would have been really great if I could have learned more at an earlier age.

      I think a lot of financial concepts could be taught in school as a part of math or computer science courses. It would be a great way to teach students using real world problems and examples.

  23. Considering how terrible the government is at handling money, combined with the fact that their last solution for “retirement savings/safety net” was a ponzi scheme (social security), I think any sort of forced savings for Americans would be a terrible idea.

    1. MFIJ says:

      My thoughts are much the same as yours. No matter how well intentioned forced savings would be, I can’t see the government doing anything other than botching it.

  24. 101 Centavos says:

    Anything with the word “force” in it is a bad idea in principle.

    1. MFIJ says:

      I am generally inclined to agree.

  25. We probably should be forced, just like how Australia has the Super Annuation system and Singapore has the same forced savings as well. Much less poverty and more security!

    Don’t leave man up to their own devices!

    1. MFIJ says:

      I would agree with you except for the fact the government has a really poor history of getting it’s programs to work. Just take a look at Social Security. While it’s very large in scale, it’s arguably the simplest program the government runs and they can’t even make sure that it isn’t headed to bankruptcy.

  26. I used to think that everyone should be left to their own devices. When I started my first job, I quickly signed up for the 401K plan but many of my co-workers did not because they claimed that they couldn’t afford to. I figured that if they didn’t have enough to retire, it wouldn’t be my problem. But now I realize that if others cannot afford to retire, then it will be my problem because of higher taxes and other government programs (that are inefficient). The alternative of financial literacy is good, but many people disregard what they learn. Linking Status to savings…not sure how that would happen.

  27. Here in Australia employers are required to make a 9.25% contribution to retirement savings (superannuation) for all employees earning over a few hundred dollars per week. It’s a great way to have something put aside, however I think too many people neglect their retirement savings because they are under the assumption that the 9.25% will be sufficient – of course over 40 years of working this is only around 4 years of income being saved (plus obviously earnings) and quite a few people are caught out.

  28. dj says:

    I’m going to take a different tact, how about we cleanup Wall Street first before we give them more of our hard earned dollars. WS has no fiduciary responsibility, they use hard, misleading, marketing tactics to push financial products. NAV increase, but fees do not; Survivorship bias; Focusing on recent historical data, profits ignoring risks.

    William Bernstein – Letter to SEC
    http://www.efficientfrontier.com/ef/103/ol.htm
    Also read his last book, “The Investor’s Manifesto”. He talks about alternative options. How about a government annuity (instead of a tax increase) to rebuild our infrastructure and other public projects.

    “The Number: How the Drive for Quarterly Earnings Corrupted Wall Street and Corporate America”, by Alex Berenson, forward by Mark Cuban.

    The Great American Bubble Machine
    http://www.rollingstone.com/politics/news/the-great-american-bubble-machine-20100405

    The Last Mystery of the Financial Crisis
    http://www.rollingstone.com/politics/news/the-last-mystery-of-the-financial-crisis-20130619

    The Scam Wall Street Learned From the Mafia
    http://www.rollingstone.com/politics/news/the-scam-wall-street-learned-from-the-mafia-20120620

    Bigger Than Enron
    http://www.pbs.org/wgbh/pages/frontline/shows/regulation/

    The Warning
    http://www.pbs.org/wgbh/pages/frontline/warning/interviews/born.html

    The Greatest Retirement Crisis In American History
    http://www.forbes.com/sites/edwardsiedle/2013/03/20/the-greatest-retirement-crisis-in-american-history/

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