Will employees grow up before it's time to retire? Should the government force people to save before it's too late—or make clear it won't do their planning for them?
Six years ago, I wrote a column about whether pensions should be voluntary. I want to revisit this question because despite the subsequent abundance of academic research, media attention, Congressional hearings, "reform" legislation, and change in administration, the situation has only deteriorated.
Since the 1980s, when a tidal wave of Baby Boomers really began hitting the workforce, the national savings rate has plummeted from around 10 percent to just 3 percent of disposable income (what's left after taxes and basic household bills are paid). Over the same period, once-ubiquitous defined benefit plans have been closing their doors in droves and the remaining programs are challenged by record levels of underfunding. The Social Security system has been overhauled, but still is expected to run dry relatively soon without another major fix. A recent estimate put the retirement savings gap of current workers at nearly $7 trillion.
Ironically, this sea change in spending and saving habits occurred over the same period in which 401(k) savings plans were created and then regularly enhanced with virtually unlimited investment options, all sorts of financial planning and education programs, as well as anytime access and autopilot features. Yet, fewer than half of all American workers today are covered by any plan, and many of those covered don't contribute anywhere near enough money, if any.
It's not news that Americans spend too much and pay too little attention to their long-term finances. The problem crosses all economic, education, sex, age, and ethnic groups (although some cohorts fare worse than others). Indeed, educated, high-income earners are among the biggest culprits: most of the decline in the national savings rate is attributable to the top 20 percent of earners. These savings patterns long predate the Great Recession and the current jobless recovery, so the problem isn't simply a lack of disposable income to squirrel away.
A starker proof of the root causes of our national problem is the incredibly and consistently high savings rates in China, Japan, Korea, and other Asian countries. It's not because of their sharp economic growth and employment rates that some of these countries are experiencing, but a culture and mentality built around the concept of delayed gratification. By US standards, a middle-class family in China would be considered poor. Yet they are able to put away a much higher slice of their earnings than their much-wealthier American counterparts.
As Pogo said, "We have met the enemy and he is us."
The latest series of legislative proposals being floated in Congress to avoid retirement doom include mandating that employers without a regular 401(k) or pension offer automatic IRA/payroll withholding, requiring that all retirement plans offer an annuity distribution option or allow retiring employees with a defined contribution plan balance to 'test drive" an annuity upon retirement; creating a federal match for certain 401(k) or IRA contributions; and directing financial literacy training for all employees. Like all their predecessors, these "solutions" miss the point. A voluntary system of employer plans and individual savings cannot be jerry rigged to help workers who will choose not to take advantage, whether directly, by saving in 401(k)s, IRAs, or piggy banks—or indirectly, by accepting lower wages in exchange for employer-paid pension and other retirement benefits.
We need a national conversation on the fundamental issue: whether to continue with a voluntary system that cannot provide meaningful benefit to the "spend now" crowd, or simply hand over to the government control of our retirement finances. Perhaps, recognizing their own shortcomings, people would prefer if they were forced to participate in a funded retirement program to which they would have to contribute some portion of their earnings—say 15 percent, be required to use the money for retirement only, and let the government or some other entity invest and manage everything.
More likely, the public would rather keep Washington's hands off its money. (Although it's never discussed in the pension world, it is also possible that the big spenders have actually thought through the whole matter, philosophically choosing instant gratification and delayed pain in retirement.) In any case, recognizing the inherent shortcomings of a voluntary system, all government can and should do in a voluntary system is provide a legal framework for a user-friendly voluntary system that offers convenience, simplicity, and a friendly nudge in the right direction for those choosing to act.
Rather than trying to make a voluntary system do the job of a compulsory national retirement program, let's first decide what Americans want: to choose for themselves whether to save and prepare for retirement and deal with the consequences; or, recognizing their fiscal incompetence, to be told how and how much to save for retirement. If (surprisingly) a mandatory retirement savings program is preferred, then let the public and the economic, actuarial, legal, and administrative pension experts begin debating what the new "America Must Save" tier should entail. On the other hand, if Americans wish to be left to sink or swim on their own, let's make this very clear, and pension reform should focus solely on absolute simplicity and retirement/ financial literacy. I suspect that an unanticipated benefit to the latter approach would be that Americans will rediscover the saving habits of prior generations once they've realized that the government doesn't view them as "too big to fai
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