Should Retirement Savings Be Mandatory?

by Jessica Sommerfield · 9 comments

Saving for retirement is important – we all know that. But, according to most nationwide reports and surveys, we still aren’t doing it: the Employee Benefit Research Institute reports that one out of every four Americans currently has less than $1,000 saved for retirement. What will it take to make more of us save for the future?

  • More financial education?
  • Eliminating excuses?
  • Making it easier?
  • Making it mandatory?

California’s lawmakers have made it mandatory. Businesses with at least five employees who don’t offer their own retirement programs will be required to enroll them in the state’s retirement program. Even though enrollment will be automatic, workers can opt out at any time (basically the reverse scenario of deciding whether to enroll in the first place). California’s plan is turning heads, but the idea isn’t new. Many other nations including Australia and the U.K. have similar programs, a few other U.S. states are already doing it, and many more are watching to see how it plays out.

There’s plenty of room for debate about how exactly these plans should work, whether they’ll be feasible for all income brackets, and how they’ll affect the private sector. The basic concept is food for thought, though. The hope of mandatory programs seems to be the following:

  • Having retirement savings programs initiated by employers who didn’t offer them before will give more people the option to save. This is especially true for those who aren’t aware or educated about other ways to plan for retirement.

There are still plenty of workers out there who don’t have an employer-offered 401K. Ultimately, we are all responsible for our own financial future, so this isn’t an excuse not to save. However, having to figure out which retirement savings account to open does require extra effort, a task some people just aren’t comfortable to make. Requiring employers to provide at least the state-initiated option for their employees would at least be something in the way of retirement planning for those who don’t have that security net in place.

  • The fact that they’re automated (out of sight, out of mind) will eliminate some of the obstacles and excuses for not planning for the future.

For some people to make positive financial steps, no matter how simple, it’s easier if the decisions are made for them. The employees who never bother to opt into retirement savings programs available to them are also unlikely to opt out of one they’re automatically enrolled in. It’s savings by default, so to speak. This point lead to an important question. “Forcing” people who wouldn’t otherwise choose to save might help them grow a retirement nest egg, but is it really helping them grow in financial understanding and responsibility? Isn’t a sign of financial maturity learning to be accountable for finances, which includes retirement?

Editor’s Note: I believe nudging employees to save via this forced-saving method is a good idea even if the participants don’t immediately learn of its benefits. After all, the nest egg that the savings will build is going to help them no matter how bad they are with money now. The only caveat is that the investment options need to be low cost and created to the benefit of actual retirement savers. Otherwise, the program will only end up helping the financial industry. Take Hong Kong for example. They setup a mandatory retirement savings program for every employee called Mandatory Provident Fund (MPF) and it works much like the 401k. The only difference is that every employee are required to take a percentage of their paycheck and pay into the program. It all sounds good in theory but only high fee mutual fund options are available. What ends up happening is that the financial institutions all get rich off the investment fees that they charge to maintain the program and funds while the workers get shafted over and over. Why do I know this? I worked there as a summer intern for a couple years decades ago and my investments has not growth at all. AFTER DECADES! Luckily, the amount in the account is small as I was working for peanuts as a summer intern but can you imagine if I worked there full time?

There are many options, opinions, and possible repercussions with a mandatory state-initiated retirement savings program like California’s. But, in general, do you think retirement savings should be mandatory? Why or why not?

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{ read the comments below or add one }

  • Latoya says:

    I think its an awesome idea. They force social security taxes on us so the only difference I see is that this set up would actually secure the futures of people financially vs social security.

    • Jessica Sommerfield says:

      I think it might not be a bad idea, either, Latoya. Of course, throwing out the term ‘mandatory’ rubs a lot of people the wrong way, but sometimes it’s the only way we’ll actually do the right thing.

    • David @ says:

      You are probably going to get social security on top of this forced retirement plan. And plus, participants are still responsible for the investment decisions and will bear all the risks of good or bad outcomes.

  • PJ says:

    I see retirement savings as precautionary but with all the things that an adult can face (divorce, loans, etc) I don’t think most of us can really save up for our retirement.

  • Andrea Miller says:

    One thing overlooked is that you have to have money to save money. Divorce, health problems and just being in the wrong place at the wrong time enter in too. Being a state worker for 16 years with 8 of them no raises means my salary is unable to keep up with costs of living. Love to same more, but hard when you make a pittance.

    • Arminius Aurelius says:

      Yes , I agree , you have to have money to make money . One of the ways to make money is to have an education and or learn a trade . There is no free ride. If you put in the extra effort so that you are superior to your competition , you will win. Those who take the path of least resistance , the easy way out will end up on the bottom of the barrel . Deservedly so . Lazy as a kid and then 4 years in the Navy , I partied . Finally woke up at 21 years old and went to the Culinary Institute of America in order to learn to be a Chef. I often worked
      1 1/2 jobs in order to earn more money [ 12 hours a day ] Eventually I opened my own restaurants [ bought bankrupt businesses ] and again worked 12 hours a day for 28 out of the 34 years I was in business . Worked long hours in order to make sure my employees were performing as I expected them to. I succeeded beyond my wildest dreams . If I as the owner of 5 restaurants could work 12 hours a day , 6 days a week , why can’t the average Jane or Joe work
      1 1/2 jobs [ 8 hours + 4 hours ] in order to financially succeed . Money makes money . Either that [ if you have no savings ] or you will live like a pauper the last 20 years of your life . There is NO free ride .

  • jim says:

    Should retirement savings be mandatory? What – like the government jails you or fines you if you don’t do so? (Kinda sounds like obama care) and I think anything along those lines SUCKS!!!!!!!!!!!!!!! Keep the damn government the hell out of peoples private lives. Let them choose to be stupid – I don’t care if they do. I just want the government the hell out of our lives. I’m sick to death of seeing America lose what she was founded on – which was FREEDOM! They already tax the hell out of us (including social security) and I don’t want to see so much as one more encroachment on our freedoms – including the freedom to be stupid.

  • Ryan G says:

    Social Security was created as a mandatory retirement savings program that also re-distributes money based on need (to some extent). The idea was to avoid having elderly people in poverty who were unable to work to support themselves.

    I don’t think retirement savings should be mandatory. I think people should be able to save or spend their earnings at their discretion. The government shouldn’t be the caretaker / nanny. Likewise, if you choose not to save for retirement, then you need to accept the consequences of not having money in retirement.

    • Janine says:

      When we have income equality, maybe. Otherwise it’s just one more fixed payment that those in low income and poverty have to take from feeding, housing & clothing themselves.

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