Should the U.S. force citizens to save?

By Allison Schrager
December 17, 2013

Americans aren’t saving enough to retire. This gap poses a problem for everyone, not just people who will face near-poverty when they can’t work anymore. Does that merit forcing people to save more?

Retirement in America is supposed to be financed by three sources: Social Security, employer pensions, and additional saving. Social Security in America makes up the foundation and serves two roles: it’s a forced saving plan by making everyone contribute 12.4 percent (the employer and employee contribution) of their income (up to the first $113,700 they earn) in exchange for the promise of income in retirement. It’s also social insurance because the lower your income, the larger your benefit will be relative to what you paid in. But for most people, it is not intended to finance all of retirement.

The problem is the other two sources are falling short. Employer pensions, for those who had them in the private sector, have been replaced by private accounts like a 401(k) plan. With these accounts, the individual is left to save enough and bear investment risk. Alas, most people don’t contribute enough. That’s apparent with baby boomers, the first generation to have these accounts for decades, who are nearing retirement with meager savings. According to the Survey of Consumer Finances collected by the Federal Reserve Board, the median value of financial assets (non-housing saving) of working Americans between age 55 to 65 was just $67,000 in 2010. That means many people will retire almost entirely dependent on Social Security and take a big cut in their living standard.

A big drop in consumption is not only a problem for the individual. Collectively it creates a drop in demand, which can devastate economic growth. Plus without any wealth, more retirees will qualify for Medicaid, in addition to Medicare, to finance end-of-life care. Projections of elder healthcare costs assume seniors will for pay the expenses Medicare doesn’t cover, especially long-term care. But if people run out of money, the burden falls on the state.

Does that justify forcing people to save more? Some, like economist Teresa Ghilarducci and Senator Elizabeth Warren reckon so. It is not a new idea. Countries like Australia and Chile already force their citizens to contribute to retirement accounts. I’ve written before how they, and other countries, finance retirement. We know from their experience that forced saving changes the government’s role in our lives and, potentially, its relationship with financial markets.

For instance, the government would have to decide how much people should save and how they should invest. It’s been estimated that Americans should be saving at least 10 percent to 15 percent of their income. But that may not be realistic for many families living paycheck to paycheck. Ghilarducci proposes a more modest 5 percent contribution. Under her plan new savings would go into an account administered by the federal government. It would also invest everyone’s savings and credit their account a 3 percent return each year. The government would make all the investment decisions and bear the investment risk. This has the advantage of being simple and predictable for American savers. But it also turns the federal government into a large asset manager and player in financial markets. It would explicitly own securities other than government treasuries. That has the potential to create an uncountable number of conflicts and unintended consequences.

Instead the government could lean on the private sector to avoid these conflicts. In both Australia and Chile private managers administer the forced saving accounts. People can pick their manager, who also presents them with a menu of investment options. The government may regulate characteristics of the investment options, in terms of fees or risk, but the manager selects the actual investment choices. Their experience suggests America could mandate saving within the employer-based pension account structure it already has.

Senator Warren takes a more progressive approach by expanding Social Security instead of individual accounts. Her plan entails more redistribution. Low earners have little income to spare and fewer forms of saving. There exists a case for more redistribution through forced saving. Under Warren’s plan all income above $113,400 would be subject to an additional 12.4 percent tax. In exchange for the new tax, higher earners will receive a small increase in their Social Security benefit (much smaller than the return they currently get from their payroll tax) while lower earners will see a larger relative increase without paying more.

This is not strictly more saving because the new tax revenue would go toward current retirees and not be saved in the economy. But in some sense it is saving, in that many people will put aside some of their income in exchange for an income stream, going to someone else, in the future. Still, Warren’s plan alters the character of Social Security. It makes it much less forced saving and protection from poverty and much more welfare for the middle class. Some redistribution may be desirable, but doesn’t need to be so radical. Instead the government could subsidize the saving of lower- and middle-income earners by either adding to their accounts or through tax credits.

Given America’s recent experience with healthcare — the problems with the mandate to buy insurance and reluctance of politicians to be candid about the redistribution required for it to work — forced saving seems unlikely to happen here. Another, potentially more palatable, alternative to forced saving is nudging. That is what Britain has adopted. The British government requires firms to automatically enroll their employees in a pension account and put 8 percent of their salary into it. But people can opt out of the account if they wish.

Nudging — defaulting people into a saving plan — has been proven extremely effective at increasing participation in pension accounts. Depending on where you set the default saving rate, it can increase the amount people save, too. More nudging increases saving, but still retains an element of personal freedom. Leaving some discretion to the individual is important because everyone has different saving needs at various points in their lives. How much you should save depends on many factors like your health or employment status, income variability, or whether you have children. Some discretion allows people to adjust their finances to suit their needs; forced saving may be too blunt a tool.

Part of a free society is letting people make bad decisions if they wish, provided there is some support to keep them from falling through the cracks. The current scope of Social Security, coupled with Medicaid, does a reasonable job at keeping retirees out of abject poverty. But a comfortable retirement requires more saving, and there a little nudge would be helpful.

PHOTO: Piggy Banks with Westpac logos on the side are seen at a Westpac Banking Corp branch in Sydney November 4, 2009. REUTERS/Tim Wimborne

20 comments

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Change the mission of the federal reserve. Have it handle SS and use the profits from lending to financial institutions to augment SS.

Posted by tmc | Report as abusive

“Plus without any wealth, more retirees will qualify for Medicaid, in addition to Medicare, to finance end-of-life care”

How about we change what Medicaid will fund? Someone who is unlikely to see another year shouldn’t receive the same level of treatment that someone who’s likely to see another 20 or 30 years. No one wants to confront the reality that there is only so much resources available and it will be necessary to triage. Some will cry death panels. But there is no reason we should be spending hundreds of thousands of dollars on someone on their death bed.

Posted by anarcurt | Report as abusive

The author recommends a forced ‘managed’ savings account? Wall Street would love it. A 401K is an individual portfolio of managed retirement accounts, where the contributor puts up 100% of the cash, takes 100% of the risk, and gets about half the profit over the life of the account, if there is any profit. At least explain the difference between a ‘managed’ fund, and an indexed fund. Risk in both, but indexed is much better for the average person over the long haul. What happened to the standard IRA? Zero percent interest for the benefit of Wall Street, and the detriment of Main Street apparently ruined the IRA.

Posted by anotherfakename | Report as abusive

unfortunately @anotherfakename is pretty much right. In the United Stats of corporate America, there will be no savings instrument that will not be tied to wall street and the markets. That means it will not be there for you when you need it. They will quietly siphon off the profits and use your money to buffer their own transactions. Just wait until the next crash and see how well 401ks will have done for the baby boomers.
We need a SAFE way to save and get at least 3% above inflation. I know, all you financial wiz’s are LYFAO.

Posted by tmc | Report as abusive

“According to the Survey of Consumer Finances collected by the Federal Reserve Board, the median value of financial assets (non-housing saving) of working Americans between age 55 to 65 was just $67,000 in 2010. That means many people will retire almost entirely dependent on Social Security and take a big cut in their living standard.”

Not necessarily, once there are a lot of people in this situation; then they become an important political constituency. Politicians love to run on a program of: “Vote for us and we’ll give you stuff and make someone else pay for it.”

Posted by walstir | Report as abusive

“Ghilarducci proposes a more modest 5 percent contribution. Under her plan new savings would go into an account administered by the federal government. It would also invest everyone’s savings and credit their account a 3 percent return each year.”
+++++++++++++++++++

Really? The Federal Government is going to invest my money?…IN WHAT?…in our fiat currency-based US stock market, whose rate of return hasn’t even kept pace with the real rate of inflation during the last 20 years?

Or maybe the government can invest our money in the bond market, that they now control almost 50% of…thanks to their “quantitative easing” program.

Or hey I have better idea. Since the FED is already in turbo-print mode, they can print up and extra 10 to 20 trillion in new money every year and just stick it in all our retirement accounts and say: “There, that’s your new investment gain for the year”. hahaha

Posted by CF137 | Report as abusive

A bit rich after printing tons of money, which ultimately drives inflation and is erodes the value of savers.

Posted by BidnisMan | Report as abusive

Why is it any more radical to tax the rich (ourselves included) than to provide tax credits to savers only?

I propose a new individual tax system:

Basic Minimum Wage: BMW (how about that?)
Basic Tax Rate Multiplier: BTRM
Assume 35 hour work weeks (has an effect of hiring more people, like a punch to the face of secular stagnation and structural unemployment). Assuming 52 working weeks for a year, we have 1820 hours worked a year.

Tax slabs
0 < Annual income < 1820*BMW*01 :: BTRM*01
1820*BMW*01 < Annual income < 1820*BMW*02 :: BTRM*02
1820*BMW*02 < Annual income < 1820*BMW*03 :: BTRM*03
1820*BMW*03 < Annual income < 1820*BMW*04 :: BTRM*04
1820*BMW*04 < Annual income < 1820*BMW*05 :: BTRM*05
1820*BMW*05 < Annual income < 1820*BMW*06 :: BTRM*06
1820*BMW*06 < Annual income < 1820*BMW*07 :: BTRM*07
1820*BMW*07 < Annual income < 1820*BMW*08 :: BTRM*08
1820*BMW*08 < Annual income < 1820*BMW*09 :: BTRM*09
1820*BMW*09 < Annual income < 1820*BMW*10 :: BTRM*10
1820*BMW*10 < Annual income < 1820*BMW*11 :: BTRM*11
1820*BMW*11 < Annual income < 1820*BMW*12 :: BTRM*12
1820*BMW*12 < Annual income < 1820*BMW*13 :: BTRM*13
1820*BMW*13 < Annual income < 1820*BMW*14 :: BTRM*14
1820*BMW*14 < Annual income < 1820*BMW*15 :: BTRM*15
1820*BMW*15 < Annual income < 1820*BMW*16 :: BTRM*16
1820*BMW*16 < Annual income < 1820*BMW*17 :: BTRM*17
1820*BMW*17 < Annual income < 1820*BMW*18 :: BTRM*18
1820*BMW*18 < Annual income < 1820*BMW*19 :: BTRM*19
1820*BMW*19 < Annual income < 1820*BMW*20 :: BTRM*20
Annual income > 1820*BMW*20 :: BTRM*20+10%

I assume that the slabs be set so that the penultimate rates be 60% (or a BTRM of 3%) and highest tax rate be 70% as a start. Rates can be adjusted according to the requirements of the nation.

No tax breaks of any kind. No combining family income. All individuals taxed using the same rules.

Assuming $7.25 minimum wage & 1820 working hours a year this will translate to:

Slab Income Tax Rate
1 13195 3%
2 26390 6%
3 39585 9%
4 52780 12%
5 65975 15%
6 79170 18%
7 92365 21%
8 105560 24%
9 118755 27%
10 131950 30%
11 145145 33%
12 158340 36%
13 171535 39%
14 184730 42%
15 197925 45%
16 211120 48%
17 224315 51%
18 237510 54%
19 250705 57%
20 263900 60%
21 >263900 70%

If the rich want to pay less taxes, it will be in their interest to push for increased minimum wages and thereby increase the tax base. Let’s put flesh on the conservative tax base broadening bones.

Following is an output of what effective tax rates are by $10,000

Income Tax Effective rate
10,000 300 3.00%
20,000 805 4.03%
30,000 1,513 5.04%
40,000 2,426 6.07%
50,000 3,626 7.25%
60,000 5,043 8.41%
70,000 6,665 9.52%
80,000 8,491 10.61%
90,000 10,591 11.77%
100,000 12,920 12.92%
110,000 15,453 14.05%
120,000 18,191 15.16%
130,000 21,191 16.30%
140,000 24,433 17.45%
150,000 27,879 18.59%
160,000 31,530 19.71%
170,000 35,430 20.84%
180,000 39,585 21.99%
190,000 43,943 23.13%
200,000 48,505 24.25%
210,000 53,305 25.38%
220,000 58,372 26.53%
230,000 63,643 27.67%
240,000 69,119 28.80%
250,000 74,819 29.93%
260,000 80,798 31.08%
270,000 87,408 32.37%
280,000 94,408 33.72%
290,000 101,408 34.97%
300,000 108,408 36.14%
and now by $50,000
Income Tax Effective rate
350,000 143,408 40.97%
400,000 178,408 44.60%
450,000 213,408 47.42%
500,000 248,408 49.68%
550,000 283,408 51.53%
600,000 318,408 53.07%
650,000 353,408 54.37%
700,000 388,408 55.49%
750,000 423,408 56.45%
800,000 458,408 57.30%
850,000 493,408 58.05%
900,000 528,408 58.71%
950,000 563,408 59.31%
1,000,000 598,408 59.84%

Posted by juggernaut | Report as abusive

@juggernaut, that actually looks like pretty good idea.

Posted by tmc | Report as abusive

Seems like the only good way to save is the old-fashioned way – coffee cans with your bills buried in the yard. 401Ks are not safe – they are subject to the vagaries of the stock market. Interest on savings in banks is so low it is pitiful.

Posted by AZreb | Report as abusive

“According to the Survey of Consumer Finances collected by the Federal Reserve Board, the median value of financial assets (non-housing saving) of working Americans between age 55 to 65 was just $67,000 in 2010. That means many people will retire almost entirely dependent on Social Security and take a big cut in their living standard.”

Not necessarily, once there are a lot of people in this situation; then they become an important political constituency. Most politicians love to run on a program of: “Vote for us and we’ll give you stuff and make someone else pay for it.” The voters totally dependent on Social Security will be able to find politicians to increase the amount that they receive.

Posted by walstir | Report as abusive

Unfortunately for this nice sounding idea of everyone having a savings account,irresponsible people won’t do it. Then the government will take more money from those who pay taxes and subsidize the “forced” savings of those who will not be responsible. I feel like I have paid enough in taxes already, thanks.

Posted by zotdoc | Report as abusive

Ms. Schrager, its December 2013, United States.
Since 2008, for 5 years we have negative real interest rates in the range -3% to -4%. Before in 2006-2008 we had brief moment of positive real interest rates. Earlier since 2000 there was another long period of negative interest rates. Since 2000 US government is constantly creating asset bubbles: real estate and stock market are the largest at present 2013.
This is a classical (from economics theory and practice) example of a policy aimed to discourage any savings and to encourage spending.
Futhermore this policy serves upper 5% of society, but creates poverty in lower 95%.
It always worth reading first anything about the country you want to write about.

Posted by Wantunbiasednew | Report as abusive

Save, don’t save, what’s the difference? Unless you start out with extreme wealth, you end up with nothing in the end. That’s the system and it’s not going to get better. I could say that our leaders represent only the wealthy and that is true, yet we have a chance to vote and we elect them. So, while I may see this and would prefer a change, my fellow americans fall into two categories, first their are the minions of the wealthy who lack skill and know their best chance for a better than average outcome is to kowtow to their masters, then there are the morons, and I think that’s all that need be said there. So, save, don’t save, what’s the difference? When the owners of the government decide to screw us again, they will. Most of any savings not taken by the government would eventually end up in the hands of doctors and hospital anyway, who would keep you alive as long as they get a check.

Posted by brotherkenny4 | Report as abusive

Save what? Most are living paycheck to paycheck with barely enough to cover the bills. If the price of gas goes up, there goes the budget. If the price of food, education, medicines and medical care, utilities go up, there goes the budget.

Government policies do not take into account any rises in prices for necessities.

Posted by AZreb | Report as abusive

Excellent article. Thoughtful comments. The problem I had with the idea of returning people’s Social Security payroll contributions to the individuals to invest as they please is twofold: 1) obviously, many ordinary folks would blow their savings on ignorant investments — favoring the wealthy investors who have more market information. 2) There would be a sudden huge sea change, lifting available money to be invested in stocks. This would bid up the value of all the stocks in the market. Who would benefit from that? All those who currently own stocks. Who are they? Again, the wealthy investors — because they are the ones who own the most stocks now. The fact is that ordinary middle income people gain disproportionately less income than wealthy connected investors, by investing in the stock market.

Posted by CharleneKing | Report as abusive

Allison, the three legged stool of pensions, S.S. and savings made retirement planning easier since even without saving the other two “legs” could keep people fairly solvent. No more.

Often 401k’s are a failure since the investment manager chosen by a company charges high fees, expenses and offers poor investment choices or so many choices that the average employee is confused. We know that some employers choose 401k administrators and managers that don’t always act in the best interest of the plan participants.

I believe that we could solve (at least partially) our savings problem in two ways.

One would be to create a savings plan where the choices would be simple and based solely on index’s. Perhaps a savings plan that put the participant in a Total Stock Market Index Fund, A Total Bond Market Index Fund and a cash account. The plan would allow a mix of these vehicles within limits so that the saver would be forced to own all three in various amounts but not put all of there savings in one vehicle. For instance perhaps only 1/2 of the savings account would be allowed in any one of the three choices. No investment “managers” needed. No management fees to drag down returns. Anyone with a computer could run this type of plan.

Another option that I like would be a savings plan with a return based on inflation. No, no, not the CPI or chained CPI that we have today. This would be something like a “RCPI” or retired consumer price index. This index would be designed around basic living needs like food, shelter, energy (to stay warm), rents and health care. It would focus much less on things like electronics, autos or leisure. Savings placed in this this type of plan would be guaranteed to match the RCPI index. Your assets would be there years from now to cover basic living guaranteed. Of course you would need a well constructed index and a government guarantee.

By the way, money placed in these accounts could never be withdrawn prior to retirement age with the single exception of terminal illness. Certified by at least two doctors. Your retirement age would be based on how much you saved. People who saved over a minimum amount would be rewarded with the option of retirement at an earlier age.

Maybe I’m a dreamer, but somehow we need to design a better system. With the pension leg of the three legged stool gone, people are falling off all over the place.

Posted by Missinginaction | Report as abusive

Should the US citizens force, if they can, their federal government to stop borrowing and save? Now the debt per capita is over $50,000 and Washington DC is talking about raising the debt ceiling.

Posted by Kailim | Report as abusive

maybe the government can make everyone wear Kelly green jock straps too…then I wonder why Congresspeople, Senators & Presidents need millions to get elected/re-elected….I also wonder about the concept of the common good of this country has gone..perhaps it’s been outsourced to Elbonia..

Posted by rikfre | Report as abusive

This is interesting, but I’m surprised there wasn’t any info on how much the baby boomer generation and the timing of the financial crisis have to do with this. Most of the solutions discussed in this column are based upon long term planning, but the factors I mentioned above will be very different when I retire (I’m 28). It makes it feel like this article is looking for long term solutions to a problem that is already on our doorstep.

Anyways I don’t know how much of a difference this will make in the final analysis but I was surprised to see no mention whatsoever of the size of the baby boomer generation and how that has affected the balance.

Posted by skiingdemon | Report as abusive