In: Economics
Not counting Social Security, should the government force people to save money in personal accounts for their eventual retirement?
Retirement in U.S. is supposed to be financed by three sources: Social Security, employer pensions, and additional saving. Social Security in U.S. makes up the foundation and serves two roles: it’s a forced saving plan by making everyone contribute 12.4 percent (the employer and employee contribution) of their income (up to the first $113,700 they earn) in exchange for the promise of income in retirement. It’s also social insurance because the lower your income, the larger your benefit will be relative to what you paid in. But for most people, it is not intended to finance all of retirement.
The problem is the other two sources are falling short. Employer pensions, for those who had them in the private sector, have been replaced by private accounts like a 401(k) plan. With these accounts, the individual is left to save enough and bear investment risk. Thus, most people don’t contribute enough.
A big drop in consumption is not only a problem for the individual. Collectively it creates a drop in demand, which can devastate economic growth. Plus without any wealth, more retirees will qualify for Medicaid, in addition to Medicare, to finance end-of-life care. Projections of elder healthcare costs assume seniors will for pay the expenses Medicare doesn’t cover, especially long-term care. But if people run out of money, the burden falls on the state.
Some, like economist Teresa Ghilarducci and Senator Elizabeth Warren reckon so. It is not a new idea. Countries like Australia and Chile already force their citizens to contribute to retirement accounts. We know from their experience that forced saving changes the government’s role in our lives and, potentially, its relationship with financial markets.
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