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.”
The dire state of preparedness for retirement in the U.S. has been well documented. Last year, the National Retirement Risk Index calculated that 53% of households would have trouble maintaining their standard of living after their working years end. The index was created in 2004 and is based on the Federal Reserve’s annual Survey of Consumer Finances. The Center for Retirement Research published a study in 2010 finding that Americans were $6.6 trillion in the hole when it came to saving for retirement.
Adding to the problem is that the percentage of households who report they are saving for retirement has fallen from 75% in 2009 to 66% this year, according to the Retirement Confidence Survey by the EBRI. And a study released this week by HelloWallet found that many 401(k) plan participants were accruing debt faster than retirement savings.
“The bottom line,” said Webb, “is that most Americans are unprepared for retirement.” He cited the fact that the median 401(k) account of those ages 55 to 64 has $120,000, which would produce just $400 a month in income. On top that, he said, less than half of workers are covered by any type of retirement plan.
“People hanker for the good old days of defined benefits plans,” Webb said. “Those days aren’t coming back. We have to make the best of a flawed 401(k) system.”
California lawmakers, who passed reform of the state’s public pension system last year, also have given preliminary approval to a mandatory retirement system to help employees of companies with more than five workers who do not have access to a 401(k) plan. Employers would have to defer 3% of an employee’s salary to a state-run fund if the law passes a vetting process and second vote by lawmakers next year.
That the law does not force employers to make any contribution is evidence of the difficulty of establishing a mandatory system.
“In the long run, we would take the view that employee salaries would fall in measure with employer contributions,” Webb said. He added that research shows that when 401(k) plans include auto-enrollment features, employers often stop making matching contributions. One reason for that, Webb said, is that as more employees are enrolled in a 401(k) plan, an employer’s benefits budget is stretched.
But political and financial realities pose a formidable challenge to anyone who wants to put mandatory retirement contributions into place in the U.S. The idea has been discussed for decades without making it into law, Salisbury said. Salisbury noted that in 40 years working on policy, he has seen a marked change in the debate over instituting some sort of mandatory savings policy. In the early 1980s, it was the conservative Heritage Foundation that was a key supporter of the idea, he said. Now, the same lobbying group is one of the leading opponents of health care mandates.
“The reading I take from the last five years,” Salisbury said, “between the level of fiscal distress faced by state and federal governments, combined with increased global competition and the role of lobbyists is that [passage of a mandatory savings plan] isn’t happening now.”
And that might be optimistic, judging by an answer he gave to a reporter’s question.
“My employment requires me to be agnostic on whether it should or shouldn’t happen, but even if I thought it was the most wonderful idea, I still wouldn’t believe it would happen in my lifetime.”
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