"Mandatory savings for individuals"

[Adrian Nenu]

Mr. Peterson added that the United States should consider the “provocative” notion of mandatory savings for individuals, as have some other countries, saying the nation had become “so consumption-obsessed and so borrowing-obsessed.”

http://dealbook.blogs.nytimes.com/2008/ ... debt-load/

Just curious, how to you feel about govt. mandated savings for individuals, as proposed by Peter G. Peterson? BTW, I mentioned this as a possible solution to the low retirement savings rate several years ago on the M* Diehards forum.

Adrian
anenu@tampabay.rr.com

[xerty24]

First it's mandatory savings accounts, next thing you know it's a 15% wage tax with a $6-odd Trillion shortfall from being able to repay all those suckers, er "savers". Of course the Social Security ponzi scheme I refer to also doesn't pay you a decent rate of return either, unless holding 100% treasuries for a 30+ year horizon strikes you as an optimal asset allocation.

link

"In net present value terms, Social Security owes $6.5 trillion more in benefits than it will receive in taxes. "

[White Coat Investor]

I'm with xerty. Once it becomes mandatory it is just a tax.

Think about it....can you get at the money any time you please? Well, what is to stop someone from putting the money in and immediately taking it out? If you can't get it any time you please it's no different than social security, except you can control what it is invested in.

[ZZ]

Maybe we need an example set.
I would be in favor of govt. mandated savings for govt.

ZZ

[AlwaysaQ]

IIRC when I was young there was a least one tax year where investment earnings up to $400 were not taxable. That's a $10000 one year CD at today's rates. Might be a start for many people who do not have access to a decent 401K; they could accumulate enough to have an emergency fund and start an IRA.

[ZZ]

Always- When were you young? That sounds like a great idea, but I don't remember it.

[AlwaysaQ]

ZZ,

I'll put it this way - I am eligible for IRA withdrawals but not yet of an age for mandatory IRA withdrawals.

.

[nisiprius]

Mr. Peterson added that the United States should consider the “provocative” notion of mandatory savings for individuals, as have some other countries, saying the nation had become “so consumption-obsessed and so borrowing-obsessed.”

We have one. It's called Social Security.

And before people start saying that Social Security savings aren't real, keep in mind that there's something unreal about any form of "savings" whenever the period of time is measured in decades. When you put money "in" the bank, the bank immediately gives it away to someone else. Your account statement is just a promise that when you come to the bank thirty years later and ask politely for your hundred thousand, please, they will be able to ask around and find someone else who happens to be depositing a hundred thousand that day that they can give to you.

The web of promises, the various buffers and protections for a bank account is completely different from the web of promises etc. for a Social Security account. People are entitled to have opinions on which system is sounder, safer, etc. but they are essentially the same. Your account balance in each case is a promise, not a Scrooge McDuck money bin full of cash (or gold or cowry shells). The person who has to keep it thirty years later isn't even the same person who made the promise to you.

[Adrian Nenu]

We have one. It's called Social Security.

SS is a tax which is supposed to support a program. It is not an individual's retirement savings account. There is no access to the principal. The SS payment is whatever the govt. says it is.

But we are going off on a tangent here...

Mandatory retirement savings would ensure that everyone ended up with something when they reach retirement age and be less dependent on SS and other govt. programs. That's Peterson's suggestion to help those who do not save adequately for retirement.

Adrian
anenu@tampabay.rr.com

[CyberBob]

Mandatory retirement savings would ensure that everyone ended up with something when they reach retirement age and be less dependent on SS and other govt. programs. That's Peterson's suggestion to help those who do not save adequately for retirement.

Whatever happened to individual freedom? Why does this Peterson person think he and/or the government knows how to run my life better than I do? I already had a nanny when I was a baby; I don't need the government taking over the job now that I'm an adult.

I agree with the above comments that paying the 15.3% Social Security tax is more than enough.

Bob

[mickeyd]

We already have SS (savings plan) and it's a mess. Why encourage the feds by sending them more of our $?

I vote No~ I am in favor of each of us making our own adult-like decisions w/o big brother prompting us.

[Trifecta]

I was lucky enough to attend the IOUSA showing here in Raleigh last night. On the live panel after the movie, Peterson did propose that idea but one of the other gentleman, Niskanen from the Cato Institute proposed an idea that Chile is apparently using. They have a mandatory contribution, similar to our SS payroll tax, but each person can choose to have it invested in the state managed pension or they can direct it to a private account for investment. It is still inaccessible but they have to option to seek a higher return, basically the privatization of SS that [some] have mentioned in the past. He said a majority of citizens in Chile were using the investment accounts and the system seemed to be working very well.

There are obviously a lot of issues with that sort of implementation here, first of all that we are using the current contributions to fund current payments. Any thoughts on that idea?

[livesoft]

Such mandatory savings would be a waste and cause higher inflation. One of the ways to keep prices down is to have no buyers at that price. If many retirees were overflowing in retirement savings, prices would just inflate to capture those savings.

A classic example of this is college expenses. With everyone saving for college and flush with money for college, colleges have been able to raise their prices. If no one could afford to go to college and stopped going, colleges would reduce their costs to keep themselves in business.

So if EVERYBODY was FORCED to save for retirement, all those retirement dollars would be severely devalued. Since I would have $5 million to buy things and all my neighbors had $5 million as well, prices would just go up because we could afford it.

It would probably be better to tax away everyone's savings accounts and make us all broke, so future prices would have to come down for us to afford to live.

[Adrian Nenu]

CyberBob and MickeyD - I understand your concerns but you have to look at the big picture. When the folks who didn't save reach retirement age and cannot work, they will vote themselves more govt. programs paid by the retired savers & workers in the form of increased taxes. Peterson thinks mandatory retirement savings is a good idea because left to themselves, some people refuse to save. If their decision affected only them, I could care less. However their decision to not save affects all of us as a society. From what I have read, the Chile model would be workable in the US, except for the high fees Chilean investors pay.

Adrian
anenu@tampabay.rr.com

[CyberBob]

CyberBob and MickeyD - I understand your concerns but you have to look at the big picture. When the folks who didn't save reach retirement age and cannot work, they will vote themselves more govt. programs paid by the retired savers & workers in the form of increased taxes.

Whoa! That's blowing my mind!
A government-mandated program now as defense against a worse government-mandated program later.

Unfortunately, MacCauley probably had it right:

A democracy cannot survive as a permanent form of government. It can last only until its citizens discover that they can vote themselves largesse from the public treasury. From that moment on, the majority (who vote) will vote for those candidates promising the greatest benefits from the public purse, with the result that a democracy will always collapse from loose fiscal policies, always followed by a dictatorship.---Lord Thomas MacCauley

Bob

[mickeyd]

- I understand your concerns but you have to look at the big picture. anenu@tampabay.rr.com

I only look at the big picture.

Forcing those who do not want to live below their means and save will not work in a free society such as the USA. For those of us who care to delay gratification and save today so that we will have a bit more tomorrow, there must be a reward and that reward is that we live in comfort in retirement while the others fight for the left-overs.

[Adrian Nenu]

I guess we'll have to agree to disagree. But consider this:

Just as taxes are mandatory because publice services cannot be financed by donations, retirement savings should be mandatory as well to save the ignorant who will not save and protect the educated who saves. I don't see mandatory retirement savings violating any constitutional rights.

Adrian
anenu@tampabay.rr.com

[baw703916]

In disagreeing with you, Adrian, I'm going to quote the following article from William Bernstein:

what matters is not how much you save, but how much more than everyone else you save. In a world where everyone saves as if they’re going to retire at fifty-five, or even at sixty-five, none can.

So, why wouldn't I want everybody else to spend money like it's going out of style?

That’s the bad news. The good news is that this analysis pertains only to society at large; if you’re reading this article, you are likely saving more than average. To the extent that you do, you’ll be able to retire that much earlier than seventy-three. The really good news is that your cohorts are saving so pitifully little that this will be relatively easy to do.

Best wishes,
Brad

[Easy Rhino]

If you don't trust someone enough to let them determine their savings rate, why trust them enough to pick their investments?

[samurai sam]

Actually there used to be something called a pension, going the way of the dodo, that took care of people that were unable to save on their own( and those who could ). Now there's a much more exciting retirement vehicle, it's called the lottery. I do agree with those skeptical of sending more money to do govt., when social security is so splendidly managed by the pols. The poor don't vote, it's unlikely there is much to fear from them organizing enough to get significant legislation passed. Bringing back the poor houses would solve a lot of problems. Short of that private pension entity with govt backing and oversight( but not by the same crew watching Freddie and Fannie ), might be a possibility.

[allsop]

Unfortunately, MacCauley probably had it right:

A democracy cannot survive as a permanent form of government. It can last only until its citizens discover that they can vote themselves largesse from the public treasury. From that moment on, the majority (who vote) will vote for those candidates promising the greatest benefits from the public purse, with the result that a democracy will always collapse from loose fiscal policies, always followed by a dictatorship.---Lord Thomas MacCauley

Bob

The rich and powerful elite is contemptuous and fearful of democracy, and that is true today as well as of a Lord living in the mid 17th century.

[UKbloke]

That quote from Bill Bernstein above is absurd. The economy is not a zero sum game.

[Dynastar]

That quote from Bill Bernstein above is absurd. The economy is not a zero sum game.

Indeed, although all the effects of everyone saving as Bogleheads would be interesting, I'd love to see someone model it. I would think real interest rates would drop like a rock, as there would be a lot more capital chasing available opportunities. Personal consumption would also fall, at least in the short run, but maybe increased investments (from the drop in real interest rates) would make up for it. Many credit card companies would close up shop.

[Sunny Sarkar]

Just curious, how to you feel about govt. mandated savings for individuals

The whole point of living in a democratic country is not to be told by the government what to do with our lives, rather decide collectively what we want to do with our lives. It has it's costs, like our pathetic savings rates, but it's still the best deal going.

[Valuethinker]

Mr. Peterson added that the United States should consider the “provocative” notion of mandatory savings for individuals, as have some other countries, saying the nation had become “so consumption-obsessed and so borrowing-obsessed.”

http://dealbook.blogs.nytimes.com/2008/ ... debt-load/

Just curious, how to you feel about govt. mandated savings for individuals, as proposed by Peter G. Peterson? BTW, I mentioned this as a possible solution to the low retirement savings rate several years ago on the M* Diehards forum.

Adrian
anenu@tampabay.rr.com

We are going this way in the UK. From 2011, I think, a mandatory 4% contribution to a pension. See also Singapore, Sweden, Chile, Lithuania.

The problem is it is not well thought out.

For the lowest 3rd or so of incomes, the loss of government benefits in retirement (means testing) will equal any gains from the pension scheme (100% effective marginal tax rate). The lowest 10% or so will actually be worse off. And of course they won't have that money in their working lives, when many of them need it to provide food, shelter etc. All that will happen is resources will be consumed in the administration and management of this money.

The government has been warned about this problem. However it is ignoring the advice.

A sensible reform has been negated by the law of unintended consequences.

[gassert]

The government already forces us to pay/save for lots of things - already one for retirement. I don't know why forced savings is such a bad idea. If anything it is better for those of us that already save because there will be less future burden for those that dont - which we will pay for anyway.

The govt makes me save by funding the fire dept down the road, so that if I'm an idiot and blow up my house I can access my safety savings,

Further - Social Security is far from perfect, but it gets a little exhausting seeing continuous agreement that this ponzi scheme is a mess. Since when is SS a retirement fund that can be compared to your own investmetns? If I die today, my kids get money for the next dozen years, my wife for the next 50. If I lop off a couple limbs and cant work I have another income stream. Oh ya, and when I retire I get another income stream. 7.65 is a small price to pay.

Oh - and when did we start living in a democracy? I must have missed that memo

[mickeyd]

The govt makes me save by funding the fire dept down the road, so that if I'm an idiot and blow up my house I can access my safety savings,

That's an interesting and unique concept, gassert. I can see how one could consider the fire department as a kind of insurance policy, but I had never heard it referred to as a savings plan.

[stratton]

That's an interesting and unique concept, gassert. I can see how one could consider the fire department as a kind of insurance policy, but I had never heard it referred to as a savings plan.

On a related note good fire service lowers your fire insurance. When I bought my first home my insurance agent mentioned I'd bought in an area with a low response time for the fire dept. So it was $X. He then mentioned if I had bought in the town where his office was located fire insurance would have been 80% more.

So yes, good fire service can *save* you money.

Paul

[tfb]

We already have mandated savings. It's called taxes. Whether taxes are too high or too low is a prohibited topic on this forum.

[Nitsuj]

First it's mandatory savings accounts

Except social security was never a savings account.

Where does it say the mandatory savings goes to the govt?

In my experience with such a system, I could choose the location of the savings, it was called Superannuation.

[Met Income]

The freedom to take care of or not take care of yourself should take priority over all else.

[Nitsuj]

The freedom to take care of or not take care of yourself should take priority over all else.

The choice to not pay for my neighbours kids education should also be available, yet it isn't.

[OzAnalyst]

Tax free compulsory superannuation (which i assume is what the subject here is) is not a bad thing, especially when appropriately supported by government means tested aid; in Australia it is a non-issue, and our rate is 9% of salary.

It's literally a non-issue, and I don't know a single person who would advocate the removal of compulsory superannuation.

[Met Income]

The freedom to take care of or not take care of yourself should take priority over all else.

The choice to not pay for my neighbours kids education should also be available, yet it isn't.

I’m not sure what your point is. There’s lots of examples where the state interferes with an individual’s freedom – that doesn’t mean we should keep restricting it in other ways simply because it’s the status quo with other issues.

[Nitsuj]

I’m not sure what your point is. There’s lots of examples where the state interferes with an individual’s freedom – that doesn’t mean we should keep restricting it in other ways simply because it’s the status quo with other issues.

There are many examples where the state improves the country by interfering with individual freedom, such as education, roads (forcing people to drive in a certain manner and in certain locations) that are more than worth it in many people's opinion.

[Met Income]

I’m not sure what your point is. There’s lots of examples where the state interferes with an individual’s freedom – that doesn’t mean we should keep restricting it in other ways simply because it’s the status quo with other issues.

There are many examples where the state improves the country by interfering with individual freedom, such as education, roads (forcing people to drive in a certain manner and in certain locations) that are more than worth it in many people's opinion.

Obviously, that is subjective. I would argue otherwise.

[LBMM]

Obviously, that is subjective. I would argue otherwise.

Please do. I'd like to hear your argument that individual freedom to drive where and how one likes is better for society than designated and controlled highways.

[Valuethinker]

I’m not sure what your point is. There’s lots of examples where the state interferes with an individual’s freedom – that doesn’t mean we should keep restricting it in other ways simply because it’s the status quo with other issues.

There are many examples where the state improves the country by interfering with individual freedom, such as education, roads (forcing people to drive in a certain manner and in certain locations) that are more than worth it in many people's opinion.

Obviously, that is subjective. I would argue otherwise.

The problem comes when the costs of acquiring information and of writing and enforcing contracts are large. In particular when you cannot fully define property rights (satellites passing over your country). Just as economic theory would predict.

Should one person decide to block a road or powerplant, then eventually all will suffer-- this is the problem with nuclear waste disposal right now.

Or there are 'tragedies of the commons' where the individual optimal solution is the wrong one for the system as a whole (all the fish in the sea are eaten).

So we have nations: a blanket contractual obligation is imposed on its citizens, for example, for national defence. A nation is a (relatively) efficient way to solve these problems.

In cases of externalities, like pollution, it's not possible for me to sue Joe for his CO2 emission which will devastate my descendants. Nor for me to sue all the Joes in this world, who have unmuffled cars or engines without catalytic converters, or who dump toxic waste into my water supply.

So you have to have an overarching authority to endogenize the externality-- make it part of the system.

In rich countries everybody's kids go to school. Even the 20% who probably don't give a damn about their kids, and wouldn't make them go to school. In poor countries of course, this is not the case.

The same thing works for law and order. It's not possible to run private police forces that, say, compete with each other. Or private national armies (say one for each political party?). Somalia has that.

And so you wind up with something called 'the State'.

Whether it is an employer corporation like Exxon, or an elected government, or some hybrid (Singapore, Dubai) of corporation and government, that is how we organise the world.

[likegarden]

I agree with Gassert, quote :
"The government already forces us to pay/save for lots of things - already one for retirement. I don't know why forced savings is such a bad idea. If anything it is better for those of us that already save because there will be less future burden for those that dont - which we will pay for anyway. "

I love my individual freedom, I do not want to pay for Medicare, Medicaid and Retirement of people who could have saved, but spent most of it. I love when they are forced to pay into SS so they have something in retirement and not go into welfare, and I then have to pay taxes for that. So what is so bad about SS? What would be so bad about the government forcing people to save in accounts? The problem here seems to be misunderstood- it is the politicians and governments who spend the SS taxes for their pet projects such as more social services and wars.

Consider the statistics of how little people actual save for retirement, and how little they understand about investing. Everybody here will agree how many people would handle their government savings account should they have access to their money. People would withdraw, make inappropriate selections, and thereafter would require the Bogleheads to pay for their retirement.

Good Luck!
Bernd

[market timer]

quote

[Karl]

Mr. Peterson added that the United States should consider the “provocative” notion of mandatory savings for individuals, as have some other countries, saying the nation had become “so consumption-obsessed and so borrowing-obsessed.”

How about the provocative notion of the government not spending trillions of dollars it doesn't have and devaluing the $US in the process.

The government is going to demand that we save after playing a ridiculous game of getting us even deeper into debt by sending out stimulus checks that you, as a patriot, were supposed to spend ASAP to stimulate the economy. How much more can Americans stimulate it? They already stimulate it with every cent they have and then borrow as much as possible to stimulate some more. It should be as stimulated as a junkie on meth.

[bluto]

How about the provocative notion of the government not spending trillions of dollars it doesn't have and devaluing the $US in the process.

Right on. Public savings would be a great way to start. The government can tell us to save as soon as they learn a new trick... of course we really need to blame voters.

It seems like a perfect storm of pressure on households to keep up with the Smith's, financial ignorance, and the $ standard/high savings overseas for low borrowing costs. As much as I dislike the thought of regulation and more government, I dislike the yearly inflation tax and/or a bailout of bad savers even more.

Either we do a better job educating people, or we intervene? But gosh, the government can't seem to manage the mandatory pension system we already have??

[G-Money]

Perhaps the answer is LESS government regulation, rather than more. From a behavioral standpoint, I'm sure most people would walk far more carefully on a tightrope if they knew there wasn't a safety net below. Fear of failure is a very powerful motivator.

[Index Fan]

"Whatever happened to individual freedom?"


I am sympathetic to this line of thought, but in this country we have decided that we can vote people into office who have the absolute ability to take from whomever they want to give to others in exchange for their votes. In this setting we will most likely be picking up the tab for those who are too irresponsible to plan for the future anyway. Therefore, I would support mandatory savings as long as the money goes to an individual account that the politicians cannot loot like they do Social Security.

[Nitsuj]

Therefore, I would support mandatory savings as long as the money goes to an individual account that the politicians cannot loot like they do Social Security.

I think this misconception is part of the problem, Social Security is not saving, mandatory or otherwise. It never was, it was just misrepresented that way. It's a tax. It's not yours.

Mandatory savings would be yours, you control it, you put it where you want it.

[grumel]

Mandatory savings would be yours, you control it, you put it where you want it.

That would be a rather unlikely system for a mandatory saveing system.
More likely for such a system it would be either 100% staate run, staate run as start setting to opt out or at least some acreditation process, guarantee requirements etc.

Sweden has a rather intelligent system where you are put into reasonable low cost asset alocation and have to opt out for a private operator. So far the many private offers much did worse. I think Japan has a system where the staate just missueses the funds and puts everything into low interest fixed income with the agenda to give cheap credit to companies.

Odds are not good for investors to do what they want. The staate wants save investments so he doesnt have to pay that much social security for ppl that messed up, the finance industry wants to sell overpriced anuity products. Anway, Sweden made it possible to get a good system.

[Nitsuj]

Mandatory savings would be yours, you control it, you put it where you want it.

That would be a rather unlikely system for a mandatory saving system.

That's exactly how it works in Australia, so it's not as unlikely as you seem to believe.

[allsop]

That would be a rather unlikely system for a mandatory saveing system.
More likely for such a system it would be either 100% staate run, staate run as start setting to opt out or at least some acreditation process, guarantee requirements etc.

Sweden has a rather intelligent system where you are put into reasonable low cost asset alocation and have to opt out for a private operator. So far the many private offers much did worse. I think Japan has a system where the staate just missueses the funds and puts everything into low interest fixed income with the agenda to give cheap credit to companies.

Odds are not good for investors to do what they want. The staate wants save investments so he doesnt have to pay that much social security for ppl that messed up, the finance industry wants to sell overpriced anuity products. Anway, Sweden made it possible to get a good system.

In Sweden 2.5% of the salary goes into into a state pension system PPM where you have a wide selection (ca 900) of inexpensive funds, and 16% goes into another state pension system where you do not have any choices.

The Swedish state forces participating funds to give huge rebates.

Much information about the state PPM funds: http://www.ap7.se/dokument/redovisning/ ... 007-En.pdf

[Justin618]

Forced savings (aside from SS – I know it’s not “savings” per se, but neither is it a tax – just forced prepayments into an annuity) is just another facet of a larger debate concerning what we want & expect from our government.

One is welcome to subsume a Libertarian / hands-off ---- where you want nothing more from your government than enforcing the laws, printing money, sending the mail, and providing national defense. Where each citizen is responsible for themselves and nothing more. That’s fine so long as you can count on your fellow citizens to be as responsible as you are – but invariably some fraction of the population will require welfare assistance. The govt can meet that need or we can push it off to private donations and cross our fingers that our lives will not be affected.

Unfortunately the sad truth is that without govt social programs (likely including forced savings in private accounts as a supplement to SS) large swaths of the people will be destitute. Although it’s easy to tout the personal responsibility anthem, it’s foolish to think you will not be affected, at least indirectly, by others.

I suspect a super majority will agree that SS has been a successful program; the question on forced savings is really will SS be enough or do we need to mandate supplemental savings (or increase SS benefits & taxes?).

Justin

PS – since we’re on the topic of govt, any votes in favor of a balance budget amendment?

[freebeer]

livesoft, re:

With everyone saving for college and flush with money for college, colleges have been able to raise their prices. If no one could afford to go to college and stopped going, colleges would reduce their costs to keep themselves in business.

It might be interesting to start a thread about this. I suspect the pricing power of elite name-brand colleges, reflected in higher-than-inflation tuition hikes in recent years, is not primarily driven by college-savings rates.

The baby boomlet increased core demand, and there a lot more just plain wealthy Americans these days. And there are still lots of folks in hock with student loans. And I would venture to guess that on some rational basis, the tuition of these elite institutions was under-priced in past decades, relative to the comparative advantage (in future salaries) gained by their graduates. I have read that second-tier institutions have had to do a lot of downright bargaining to get students.[/quote]