Debate: Should People Be Forced to Save for Retirement?

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Jan 07, 2015
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Activity, Behavioral Finance, Question of the Day, Investing, Savings

Many of you are aware of the dismal statistics regarding retirement savings.  Here are just a few:

  • 1/3 of workers have less than $1,000 set aside for retirement (USA Today)
  • For those nearing retirement…”Among people 55 to 64, average household retirement savings total only $12,000 (US News and World Report.)”
  • Percentage of people ages 30-54 who believe they will not have enough money put away for retirement:  80% (StatisticsBrain)

Yes, I know retirement seems a long way off for an 18-year old with college ahead of them but I don’t think it is too early to impress upon them the importance of saving for retirement once they enter the work world.  After all, they have the power of compounding interest working in their favor (here’s a great chart to demonstrate this)!

This WSJ blog post takes the viewpoint that people should be forced to save for retirement:  

In their 2009 book “Nudge,” professors Richard Thaler and Cass Sunstein give us some powerful clues.  It turns out that  “forcing” people to save in workplace retirement plans (where your default option is participation, and the only way to avoid it is through the “hard work” of proactively opting out) is highly effective in increasing our financial well-being.  Here’s an idea comes from Thaler’s innovative Save More Tomorrow Plan: If the government required all workers to invest a portion of their earnings in low-cost, index-like funds with a default mix of 60% stocks and 40% bonds, set a minimum saving threshold of 5%-10% a year, and again defaulted to taking at least 30% of each raise and allocating it to long-term savings, many more Americans would be on the right retirement track.

I thought this could be a jumping off point for a debate over the pros/cons of forcing people to save for retirement.  Why?  It incorporates several key concepts:  compound interest, behavioral finance (why aren’t we good at saving for long-term goals?), employer 401(k) plans, Social Security and provides students with opportunity to grapple with new vocabulary and terminology.  Students could be assigned to one of two viewpoints:  Forcing people to save for retirement is a good idea OR Forcing people to save for retirement is a bad idea.  Encourage them to find statistics or research to support their viewpoint and then bring the class back for a debate.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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