Good Question: Should We Force People To Save For Retirement?
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MINNEAPOLIS (WCCO) – In a time where individual choice rules the way Americans save for retirement, Americans are making a lot of bad choices.
We have to opt into a 401(k), pick the percentage of our income we contribute, and pick the mutual funds we invest in.
“There’s a lot of reasons why we are bad at it,” said Aaron Sojourner, a human resources assistant professor at the University of Minnesota’s Carlson School of Management.
Sojurner has researched the decision-making process behind retirement savings plans.
“[Americans are] not making perfectly well-informed decisions right now,” he said.
Could the government force people to save money for retirement?
They’re already doing that with Social Security, Sojurner said, so the legal precedent is there.
But Social Security was intended to be a safety net in a time where most workers were enrolled in defined-benefit pension plans. Today, most of us are on individual plans.
We pay about 6 percent on our income under $113,000 into social security. The average benefit is around $14,000 a year, the maximum is $30,000.
In Australia, they have a mandatory retirement program not unlike social security, but the contribution is 9 percent. Most experts say we need to save 15 to 18 percent of our income for retirement.
Sojurner said he doesn’t think there’s the political will to expand Social Security into a larger program, or set up a secondary, parallel mandatory retirement saving plan.
“What the government could do — and what companies could do — is to change that default,” he said.
For most employees, the default contribution rate is zero percent, and you have to opt-in to a 401(k). Some 65 percent of us do that, according to consultant Aon Hewitt, as quoted by the Wall Street Journal.
However, when companies automatically enroll employees, forcing them to opt-out if they want to, 83 percent contribute. That’s a major change, just by automatically enrolling employees.
So if a company forces you to initially enroll in a 401(k), what’s the right contribution rate?
“That’s exactly why this is controversial,” Sojurner said. “The question becomes where do you default people into? Is it 3 percent, 6 percent, 12 percent?”
It matters, because people tend to just stick with whatever percentage the company picks. That, however, can lead people to save less than they would have if they had to opt-in and set their own contribution rate.