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October 31, 2013 at 09:04 AM
There’s plenty of evidence that Americans come up woefully short — as much as $6.6 trillion — when it comes to saving for retirement. The open question is how to fix the problem.
Campaigns by employers, financial advisors and retirement plan providers have fallen short. Some financial heavyweights are advocating an idea that many would find un-American: mandatory retirement contributions.
The idea might be gaining some support in the U.S., but instituting it won’t be easy.
“Everybody’s a rugged individualist,” said Anthony Webb, a senior research economist at the Center for Retirement Research at Boston College, “until things go wrong.”
“The problem,” Webb added, “is that somebody has to pay for it, and neither employees nor employers are lining up to be first.”
Retirement savings are mandated in varying ways in countries like Australia, the U.K. and Chile. Last May, Larry Fink, chairman and CEO of BlackRock, added his voice to those backing such a system.
“The current system is not working, and we need a comprehensive approach that includes some form of mandatory savings in addition to Social Security,” Fink said in a speech at New York University’s Stern School of Business. “The longer we wait to fix it, the tougher the task becomes.”
Fink added that a mandatory system would need to be phased in and that workers would be allowed to make additional contributions to their retirement accounts.
Still, even a mandatory retirement savings plan might not help the lowest wage earners, the group that needs the most aid. Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, said research over the last three decades casts doubt on the effectiveness of such plans in reaching that goal.
“Essentially, dollar for dollar, pound for pound,” he said, “anything you’re trying to achieve for the lower half of the labor market is best done by an addition to Social Security, not by a separate system.”
That’s because, he said, even setting aside 6% of wages won’t add up to enough to pay for retirement.
Australia, which created its mandatory retirement system in 1992, has achieved a high savings rate. A research paper published by the Center for Retirement Research at Boston College, found that 90% of the country’s workers have money in so-called Superannuation Funds. The system mandates that employers contribute 9% of an employee’s earnings to retirement accounts. In addition, workers can make voluntary contributions, and there is a means-tested pension benefit paid for from general revenues.
But even a system that promotes savings has its flaws. Australians might accrue account balances at a steady rate, but the means-tested pension benefit has had an unintended effect. “The big problem with the Australian system,” Webb said, “is what happens at retirement. People cash in their retirement savings so they can qualify for the pension benefit.”
