Many economists are concerned about the impending retirement
crisis, given the shortage of savings. Consider that the median value of
retirement accounts for Americans between ages 55 and 64 was $103,200 in 2013,
according to the Survey of Consumer Finances from the Federal Reserve. That's
not even enough to fund health care through retirement. But those people are
the lucky ones. Many elderly Americans today rely on Social Security for more
than 90% of their income: 22% of married couples and 47% of singles live on
Social Security payments alone.
At least one person believes Americans should be forced to
save. Meir Statman, a professor of finance at Leavey School of Business at
Santa Clara University, wrote a paper titled "Retirement Income for the Wealthy,
Middle and Poor." It makes the case for mandatory retirement savings
because, "I tire of nudging nonsavers into defined contribution plans with
cute tricks," he says. By "defined contribution plans," he's
referring to 401(k) plans, 403(b) plans and the like.
Is it time for a
shove instead of a nudge?
People know they need to save for retirement, but they also
know that exercise is important and veggies should make up the bulk of their
The problem with retirement is that it is light-years away.
Individuals are not as farsighted as economists think. They tend to overindulge
in the present, ignoring the consequences for the future. The problem is
twofold. Many people don't have jobs that offer retirement plans. Even those
who do have access to retirement plans often don't save enough.
Problems with a
Since the mid-2000s, researchers and policymakers have been
coming up with ways to ease people into saving. So-called nudges include
automatic enrollment and easy, all-in-one default investments known as
target-date funds. The Pension Protection Act of 2006 made it easier for
companies to offer these plan features to workers. Despite this benevolent
manipulation by the federal government and American employers, people still
don't save enough for retirement. And half the country is un-nudge-able: Only
about half of American families have retirement accounts, according to the
Statman's paper lays out a plan for a system that would
require contributions from employers and employees totaling a minimum 12% of
earnings. The default investments would be diversified target-date funds with
fees of 30 basis points, or 0.3%, or less. Importantly, there would be no
raiding the cookie jar early for a loan or hardship withdrawal.
In today's voluntary system, lots of people are getting
access, so they withdraw money or borrow against it. Some people never join and
people who do join may use money to fund current expenses -- not luxury, but
for many things like supplementing income during unemployment. And it leaves
them shortchanged when it is time for retirement.
Problems with a
Many Americans bristle at the idea of being forced to do
things -- buying insurance for instance -- even when it's in their best
interest. There is the issue of free will: What if people want to burn their
money now and don't care about the future? Why should policymakers tell us what
to do with our money?
The libertarian spirit is alive and well in America, and so
is the penchant to spend money. Part of the challenge with Americans is the
culture of living for today, and part of the challenge is consumption and the
temptation to spend money. A portion of America's success can be attributed to
healthy buying. Historically about 70% of gross domestic product has come from
Nudges are kind of
Tricks and nudges such as automatic enrollment do work. Most
people just need a little extra help getting started. While it may seem like
people don't want to save, we don't see that in our work, says Piyush Tantia,
executive director of ideas42, a nonprofit behavioral design firm.
In a financial literacy initiative, his company was able to
get people to save more through financial coaching sessions that walked
participants through the financial transactions needed rather than just telling
them what to do and setting them free. People who got the extra hand-holding
saved 20% more than those who were simply told what to do. Sometimes providing
extra incentives, such as a prize, can get people to save.
Is the current system
Tricking everyone in the country into saving sounds
impractical, but without some nudges, the results could be ruinous for
individuals, as well as society.
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