It’s no secret that the United States is facing a retirement savings crisis. In short, people are simply not saving enough. Scary retirement statistics pop up in headlines every day, but to me this is the scariest of all: over half of all Americans aren’t saving anything at all for their old age. And since so few people have pensions these days, the burden of saving for retirement falls squarely on Americans’ shoulders. But we’re not doing it. At least, not nearly as much as we should be.
When the shift away from employer-sponsored pensions towards privately-owned 401(k)s and IRAs began to take root about 40 years ago, the idea was sold to American workers as a way for us to take control of our own savings. Playing on our individualistic spirit, big businesses told us that we would be able to make bigger returns if we invested our money ourselves. But the problem is that American wages have been declining since the 1970s, leaving less available for us to save. This is at the same time that healthcare, food, and housing costs have been increasing. Even if people can technically afford to put money aside, it becomes difficult to think about retirement – a diffuse, distant idea for most people – when there are lots of costs that need to be covered now.
So what to do about this problem? Pensions aren’t coming back and 401(k)s don’t seem to be appealing to a lot of Americans. I read an article the other day that detailed an interesting idea promoted by a professor at Santa Clara University named Meir Statman. Basically, he thinks that American employers should be forced to withhold retirement savings from our paychecks, to be directly invested into a 401(k)-style account. In other words, that participation in a defined-contribution retirement plan should be mandatory. Out of our hands. The accounts would still be privately-owned, but we wouldn’t be able to access them before retirement age for any reason and enrollment in the plans wouldn’t be voluntary.
The article is a good read, so I really encourage you to take the time to read it, but I also wanted to share my favorite quote. I like it because Professor Statman doesn’t beat around the bush when it comes to politically-charged vocabulary – he’s describing the plan he envisions exactly as it is:
“It’s a retirement savings solution centered on a paternalistic second layer of mandatory private defined contribution savings accounts in a retirement savings pyramid, above by the paternalistic first layer of Social Security and below the libertarian third layer of voluntary savings.”
I have to say that I really like this idea. I actually already sort of have a plan like the one Professor Statman describes; my employer withholds 7% of my gross pay to contribute to my pension. And I love it. I love that I don’t have to think about saving at all, that the savings just happens. Over few short years I’ve been working, “I’ve” already saved over $15,000. It’s very comforting to know that even though my own retirement savings have been….um, lacking….I’m still building a nice little nest egg with my mandatory contributions. I think a lot of Americans would benefit from a plan like this.
But what do you think? Do you like the idea of being forced to save for retirement?
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