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Mandatory Retirement Savings

Author

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  • Meir Statman

Abstract

Nudges toward voluntary defined-contribution retirement savings have transformed many nonsavers into savers but have left many behind. The author argues that it is time to switch from libertarian-paternalistic nudges to fully paternalistic shoves. He advocates a retirement savings solution centered on a paternalistic second layer of mandatory private defined-contribution savings accounts in a retirement savings pyramid, above the paternalistic first layer of Social Security and below the libertarian third layer of voluntary savings.Nudges toward voluntary defined-contribution retirement savings have transformed many nonsavers into savers but have left many behind. It is time to switch from libertarian-paternalistic nudges to fully paternalistic shoves. I draw on evidence from the United States and other countries to advocate a retirement savings solution centered on a paternalistic second layer of mandatory private defined-contribution savings accounts in a retirement savings pyramid, above the paternalistic first layer of Social Security and below the libertarian third layer of voluntary savings. Mandatory defined-contribution retirement savings plans exist in Australia, the United Kingdom, Israel, and other countries. Minimum mandatory contributions are set to increase to 12% of employee earnings in Australia, 8% of earnings in the United Kingdom, and more than 18% of earnings in Israel. Indeed, mandatory defined-contribution retirement plans are in effect at many U.S. universities, even if they are not described as such. Universities contribute an average of 10% of employee salaries as “core” contributions, regardless of employee contributions. Additional employee contributions are voluntary at some universities and mandatory at others. Existing mandatory defined-contribution retirement savings plans offer lessons about features worth adopting and features worth avoiding. Features worth adopting include the following:Combined mandatory contributions by employers and employees amounting to a minimum of 12% of earnings.A central agency to administer plans for employees whose employers do not provide defined-contribution retirement savings plans. Default offerings of well-diversified target-date funds set in one-year intervals. Fees not exceeding 30 bps. No borrowing from retirement savings accounts and no cashing out of accounts before retirement age. Enhanced financial literacy without hampering the retirement income of people lacking financial literacy.

Suggested Citation

  • Meir Statman, 2013. "Mandatory Retirement Savings," Financial Analysts Journal, Taylor & Francis Journals, vol. 69(3), pages 14-18, May.
    • Handle: RePEc:taf:ufajxx:v:69:y:2013:i:3:p:14-18
    DOI: 10.2469/faj.v69.n3.3
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    References listed on IDEAS

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