“In an ideal world everyone would generate sufficient savings on their own to help fund their own retirement. However most of the data shows that Americans are simply unable to do this on their own.” – Tadas Viskanta
In one of my MBA classes on leadership and organizational behavior we went over the five personality factors and how they relate to successful leadership styles. The factors are conscientiousness, extraversion, openness, agreeability and neuroticism (you’d be surprised how many CEOs score very high on the neurotic and even narcissistic scale).
The one that really stuck out in my mind was conscientiousness. Basically, having this personality trait means that you are thorough, efficient, systematic, hardworking, reliable and have the desire to perform your tasks well.
Having these traits is an obvious plus for your career and as it turns out, another important part of your life as well.
Meir Statman had an article in the Financial Analysts Journal in which he described how conscientious people don’t spend on impulse or buy things they don’t really need. This makes them better savers along with the fact that they tend to accumulate more wealth than those who are not conscientious even after accounting for differences in income, education and cognitive ability.
Since all people are different, there are going to be many of us that aren’t conscientious and therefore aren’t adept at saving and planning for the future.
This could help explain why, according to an EBRI survey, 30% of US workers have less than $1,000 in savings and investments, while 3 out of 4 have less than $30,000 in retirement accounts. And 28% have absolutely zero confidence that they will have enough money saved to retire.
SO WHAT’S THE SOLUTION?
I think one of the ways to make big changes in our savings habits is to educate people on financial literacy. Some people claim that at this point we should all know the steps we have to take to save, invest and live within our means.
But there are still people out there that don’t understand the big picture just yet. A recent Wells Fargo survey showed that only 1 in 3 millennials (ages 22-32) who have begun to save say “they realized that starting early can result in a bigger nest age down the road.”
So even though they are saving they don’t even know the benefits of why they are actually doing it (compound interest, good behavioral habits, etc.). Most are simply saving because their employer offers a 401(k) plan. Without having the basic understanding of why you have to save it is very easy to give up on that part of your finances when life gets in the way.
WHAT IF THAT DOESN’T WORK
But even if we do increase awareness on the need to save and invest for the future, there will still be those people that are not conscientious and need help changing their behavior. And behavior is what it really boils down to in most cases.
People just seem to have a hard time changing how they act and our behavioral biases cause us to constantly make mistakes that hurt us in the long run. These can be very hard to fix.
That’s why the automation of our financial and saving decisions is so important. This makes it easier to take the minor decisions out of your hands so you don’t even have to be conscientious, it just happens automatically.
But Statman would like to take this a step further and make saving for retirement mandatory. He thinks that the situation is so dire that we need to take corrective action to force people to plan ahead.
This idea is actually not all that far out of the realm of possibility. He outlines in his article that Australia has a mandatory plan that requires employers to contribute 9% of employee earnings to a mandatory defined contribution retirement plan. And that amount will slowly increase to 12% of salary over the next seven years or so.
Israel and the U.K. have set up similar programs to ensure that their citizens are savings enough for life after the workplace.
Statman goes on to lay out his ideas for how such a plan could be set up for American workers. Here are the main points that are outlined in the article:
- Combined mandatory contributions by employers and employees at a minimum of 12% of salary (equal to Australia’s target).
- To be administered by 401(k) providers.
- Default investment options would be well-diversified target date funds.
- Fees of no more than 30 basis points (0.30%).
- No borrowing from retirement savings accounts before retirement age (I like this one).
- Enhanced financial literacy through education at high schools and elsewhere (this one is important as well).
I generally don’t think that people should be forced into doing anything that they don’t want to do (assuming it’s not a law of some sort). But in this case I can see the need for an exception. Too many people are far too unprepared (not conscientious enough?) for their financial future.
If you think about it, this would be no different than the money taken out of our paychecks for taxes, social security and Medicare.
A program like this would have to be rolled out in phases over a number of years to eventually get to the 12% mark. This would ease the pain but having employers pitch in for some of the savings would take some of the sting out of it for those saving absolutely nothing at the moment.
It would be great if everyone was willing and able to save for their retirement on their own. Obviously, the statistics prove that this isn’t been the case.
In China, where per capita income is much lower than the US, they have a personal savings rate of more than 50%. The latest reading from the Federal Reserve shows that the US has a personal savings rate of under 3%.
There are cultural, economic and standard of living differences that account for some of this gap but the point is that we need to make saving a much higher priority than it is currently.
I think financial education can help. But changing ingrained behavior is difficult. For those that don’t have the correct personality traits needed to better prepare themselves for retirement, a mandatory savings program might be our only hope.
Sources:
Mandatory Retirement Savings
China’s Savings Rate World’s Highest
More Than Half of Millennials Say Debt is Their “Biggest Financial Concern”
The Retirement Savings Crisis
Personal Savings Rate
Further Reading:
Does the US Need Mandatory Retirement Savings Program?
Mandatory Savings Accounts Are Coming Your Way
Finance Blogger Wisdom: Mandatory Retirement Savings
Study: People With Self Control Are Happier
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Honestly I think a force savings for retirement would be great. But I think it should have options like the percentage you have to save maybe 4.6.8. 10 etc. No one is just going to take you saying the min you can do is this without options. You will have a lot of people complaining at first but they will be thankful in the end. I doubt it would happen here in the states though.
It sounds like the way they are doing it in Australia is through a gradual increase. Maybe they could have people start out at a lower level like you suggest, (4 or 6%) and increase by 1% per year until they hit 10% or so.
I think you’re right that this is a long shot though. Most people don’t like to be forced to do something, even if it’s in their best interest.
I still do not understand the desire of some people wanting to help people who do not want to help themselves. Can you see the pattern? We will help you even if you do not want. The next step would be a prison, for not saving for retirement, wasn’t it?
Although I understand the impact of having thousands of retirees without savings and living only off of the SS payments, I still cannot swallow making saving for retirement mandatory. We have SS available, lets reinforce it and make an adjustment that those who do not save for retirement will be required to contribute to SS let’s say 3% more than what you are normally contributing. But then let the entire system rely heavily on intensive education. Tell me when schools are teaching anything about finances – from elementary to college, except those specializing on finances, but regular schools. And what they teach about finances. Nothing. Here is the base of the problem.
I agree with you that education is definitely the first step. Giving people the basics would help keep many more people out of debt and get them started down the savings path. Usually the bad habits get started at a young age and get worse over time.
It would be kind of a hand holding deal if we forced people to save for retirement and some would still figure out ways to mess it up (like selling their future balances for current cash flow).
But something needs to be done to help others in this area since the current system is broken,
I think the government forcing people to save for retirement is a bad idea. They’re already doing so through Social Security which I wish I could opt out of and use the cash as I pleased. That’s an extra 6.2% of my pre-tax income I don’t have access to. Saving for retirement is heavily incentivized with tax breaks. And every person’s situation is different. I’m striving to reach financial independence ASAP and maybe retire early, we’ll see when I get there. What good is more savings if I don’t have access to it. This is why I’m having just enough to get the full employer match in my 401k because I just can’t turn down free money even if it is tied up.
Your proposed plan and Australia’s are very different. AUS 9% and increasing to 12% employer contribution. Your plan is 9-12% combined contribution. How would the contribution levels be defined? If I am prudent and want to take retirement in my own hands and save 15% does that mean the company doesn’t have to put any in? That just smells of the opportunity for politics to get involved and there to be omissions from the laws for certain groups. I’m not saying that was your plan but I see big pitfalls with this and well pretty much anything that gets the government involved.
That’s not to say that I don’t believe we have an issue and that there’s going to be a lot of people that are in a world of hurt when it comes to living a comfortable retirement or even retiring. I’m all for the freedom to do what I want and luckily I live in a country where that is allowed for the most part. One thing we’re seriously lacking is personal responsibility. It was really frustrating when they started passing all of the refi and mortgage forgiveness programs. So you pretty much got screwed if you were responsible and didn’t take on too much debt to buy a house. Or if you did like me and didn’t purchase because you didn’t have the money and the numbers just didn’t work out right for it to be a smart financial move.
In order to really create change I think more emphasis on educating people on the basics of personal finance needs to be covered. In high school I had to take an economics class, that sounds like the perfect time to start getting the education started. And there’s also that little subject that is taught from 1st grade on called math. That’s another good opportunity to reinforce the principles, or at least the math behind them.
One thing that I can kind of get on board with is automatic enrollment into 401k plans. I’m pretty sure that has been allowed but I don’t remember for sure. The plan was that as a new hire the employer could automatically enroll you in the 401k plan so it puts the impetus on you to fill out the paperwork to cancel the withholding rather than initiate it.
Sorry for the rant.
No worries on the rant. This is definitely a subject worth ranting about.
I should clarify a point on the Australia plan because I think the way I worded it was confusing. The employer withholds the money for the contributions (like taxes) from the employees so it’s not technically an employer contribution or match. It’s all employee funded or at least that’s how I read it. Maybe here they could do a 6% split between employer and employee.
Anyways, I do agree with you that it would be challenging to make this a reality and education should be the main priority. I think high school is the perfect time to discuss the basics (debt, saving, investments, time value of money, etc.). Learning that info before going to college or the working world would help so many people avoid money mistakes and take that personal responsibility.
Along the lines of an automatic 401k enrollment, Richard Thaler is pushing for and automatic increase each year to increase the amount we save. Look up ‘Save More Tomorrow’ if you’re interested.
You present very good arguments on both sides of the retirement coin. It’s very important for younger people to understand the value of saving for their retirement. Well done.