It's not news that Americans aren't saving enough for retirement. The 2013 Retirement Confidence Survey from the Employee Benefit Research Institute and Matthew Greenwald & Associates, found that 57% of those polled had less than $25,000 saved for retirement.
“In days gone by in a land far, far away, we had a wonderful thing called pensions. A person worked at a place of employment for 25-30 years and they knew that when they left they would continue to receive money each and every month from that employer. They could even pass that on to their spouse. What a wonderful world that was,” says Annalee Leonard, founder of Mainstay Financial Group.
Welcome to reality. It's not surprising that there are cries for mandatory retirement savings from the likes of investment behemoth BlackRock's CEO Larry Fink and other quarters. “I am glad to see that the calls for mandatory enrollment continue. This should go a very long way in ramping up the personal savings rate and would likely have far reaching social impacts in encouraging more responsible attitudes toward saving investing, put wealth in the hands of families and communities where it has historically been lacking, and increase engagement (societal) and understanding of the business world,” says John Hauserman, CFP Board Ambassador and author, RetirementQuest: Make Better Decisions.
Forced savings can help those who may not have otherwise saved for their future. “Any supplement to social security is helpful. A small amount saved, especially when started early enough in one's career, is not likely to be felt in the ultimate take home amount,” explains Leslie Tayne, of the Law Offices of Leslie Tayne, which specializes in debt issues.
Others point to the fact that when Americans fall short financially the onus typically falls on the government. “Entitlement programs are the 800 pound gorilla for our country's deficit. The government needs to shift as much of the burden of retirement away from itself and onto the shoulders of our citizens. Mandatory retirement savings is one of several methods of addressing this issue,” says Bradley Bofford, managing partner at Financial Principles.
The bottom line is, who knows what changes will be made to Social Security and other programs in coming years? The voluntary system, the 401k didn't prevent the crisis.
Then too, private companies realize, “You can't guarantee an income stream for retirees who are increasing their life expectancies at an increasing rate, and expect to remain viable. Companies can't do it and neither can the government, mandating private savings is a potential means to create an alternative,” says Hauserman.
How might this work?
There would be a requirement that employees must contribute some percentage of earned income into retirement savings. There is also talk about adopting the model Australia has been using for the last 20 years. “Their type of mandatory savings requires employers to contribute to the employees' accounts at a greater rate than the typical match. Additionally, the employee is forced to contribute anywhere from 3-5% of their salary into the savings plan,” says Bofford.
While the idea of mandatory retirement savings at its core appears to make sense, there is the matter of implementation, says Tim Gagnon, Northeastern University professor and faculty director MST & MSA On-line Programs. He has many questions. “Does the government mandating the savings infringe on personal privacy? Does a minimum wage earner have the ability financially to reduce their take home pay and still meet daily needs? Does this just line the pockets of the investment community (with account and trading fees)? How does the market volatility play in? Should there be a baseline guaranteed return that the accounts will earn so that they will grow?”
According to a spokeswoman at the Center for Retirement Research at Boston College, contributions to the mandatory accounts should be made by the employer so that the employee doesn't feel the right to withdraw funds before retirement. Avoiding early withdrawals is important because, in the existing 401k system, such leakages have proven to be a problem.
Simply a bad idea?
“This isn't Russia; Americans are supposed to be free. People should be able to spend or save their money how they desire,” says Tom Hegna, author of Paychecks and Playchecks: Retirement Solutions for Life.
Voicing a similar sentiment, “Are you kidding me? It's not the government's job. Period. If people want to drink their liver into failure; smoke their lungs to cancer; ride their motorcycle without a helmet, or enter retirement with no money – it's their choice,” says Tami Simpson, founder of Wealth Financial Group West.
The problem with mandating savings is who will pay for it? “Force employers to add to payroll the costs and companies may close or lay off employees to address the costs,” says Roy Laux, president of Synergy Financial Services.
One could even argue, says Bofford that mandatory savings would have an adverse effect on the economy, as less dollars would be spent on goods and services.
Then too, says Ted Sarenski, CEO of Blue Ocean Strategic Capital, “Something that is mandated is often resisted. If someone doesn't like that their money is being put into savings for them against their will, they will most likely not keep the money in that plan if they leave that employment.”
If however, mandatory savings come into being, Edmund Mierzwinski, consumer program director for U.S. PIRG (U.S. Public Interest Research Group), says, “We must be careful not to create mandatory savings without creating an enrichment program for the powerful money managers and stock brokers who have grown fat and happy selling over-priced, under-performing products. Some of these firms smell that new mandatory savings program fee income, and are among those calling for it to be made law. If more and more middle-income consumers will be looking for places to put their mandatory savings, we'll need to have some robust protections.”
Mandatory savings accounts aren't a panacea, but the concept has a discussion going, ideas on the table. “One possible solution is to earmark a portion of the income tax or social security tax that would go towards an individual's retirement fund. With this method, workers would not have to lose anything from their paycheck, but it would force the government to come up with spending cuts to make the program work,” says Hegna.
What's not up for debate is that something needs to be done about America's retirement savings crisis. Says Sarenski, “What is the proverb? Give a person a fish and you feed them today; teach a person to fish and you feed them a lifetime. We need to teach and teach well.”