Abnormal Returns is on hiatus this week. However that does not mean that we are content-free. As we did last year, and the year before, we asked a panel of independent finance bloggers a series of (hopefully) provocative questions. We hope you enjoy these posts as much as we do putting them together. Check out answers to yesterday’s question on the active/passive debate. Feel free to jump in the comments with your own answers to the questions.
Question: I argue in this post that a mandatory savings program would be net-net beneficial to society. Agree, disagree? (Answers in no particular order.)
Josh Brown, The Reformed Broker, @reformedbroker: We’ll find a way to render its benefits moot. Won’t help. Also, sounds inflationary. My favorite definition of inflation is “A period of time when no one has enough money because everyone has too much money.” Let’s not act like this isn’t all a zero-sum game.
Brian Lund, bclund, @bclund: No matter how enticing this idea seems, at the end of the day it is just another way of relieving people of their personal responsibility. And even if it was implemented, those who wanted to would find their way around it, like selling the discounted value of their mandatory savings plan for immediate cash, would. Then there would be all the exemptions allowed for various socioeconomic reasons, etc. Of course there will be a lot of “experts” in the financial industry who will say that this is the best thing since sliced bread since they will no doubt find a way to help “administer” these programs and reap the related fees from them.
Jeff Carter, Points and Figures, @pointsnfigures: I disagree on a mandatory savings program-unless it was a privatization of social security. I would also eliminate taxes on the savings, and growth of the savings-similar to a 401(k) self directed IRA.
Robert Seawright, Above the Market, @rpseawright: Sadly, I agree. I would love for freedom to work in this (and in almost every) instance. But it seems clear to me that, left to our own devices, we will continue to screw up our retirement planning and screw it up pretty badly. Therefore, and on account of the potentially dire societal consequences of inaction, I have come to the unfortunate conclusion that this lousy alternative – mandatory saving – is necessary.
Morgan Housel, The Motley Fool, @TMFHousel: I agree. It’s clear that most Americans don’t save enough, and that their lack of savings stems from abysmal financial literacy and not knowing how to save. At the same time, I’m sympathetic to the view that we shouldn’t force everyone to save a certain amount, especially if they have limited control over how it’s invested. I’d like to replace the optional, opt-in 401(k) system with a mandatory savings program with some sort of opt-out function.
Kid Dynamite, Kid Dynamite’s World, @kiddynamiteblog: Mandatory savings is tricky – because savings is only 1/2 of the equation – the key is rate of return on the savings/investment plan. Somehow I feel like this discussion leads back to defined benefit vs defined contribution plans if you talk about it enough… Anyway: I think the problem with forced savings is that the people who most need to save are the ones who can least afford to take that additional “hit” to their current income, and the people who can afford to save have the issue of asset allocation that I alluded to in the first sentence…
David Merkel, Aleph Blog, @alephblog: This is a simple question of ethics. Don’t force people to save. Social Security is bad enough, and it will end badly as well. Let people be free, and suffer the consequences of not saving. There is no advantage to the economy from an increased savings rate. Better to eliminate all tax preferences for saving and investment, so that only what makes sense receives investment. Also, DB plans, if properly funded, are very expensive. Who can afford to do that? This is another example of people wishing that they could create a new reality with time machines and antigravity.
Bill Luby, VIX and More, @VIXandMore: The issue of a mandatory savings program is a complex one and even if it is net-net beneficial to society, there will be a large number of individuals that will oppose this idea, with the degree of the opposition a function of how the mandatory savings program is implemented and how much flexibility it gives to those who are active savers. Given the retirement crisis that many Americans and global citizens will soon be facing, the idea of a mandatory savings plan that serves as a middle tier of between a mandatory Social Security program and voluntary savings programs does make a good deal of sense. Nailing down the right particulars, getting the execution right and steering clear of collateral economic damage – not to mention the political dimension of this – will make it difficult to move from theory to practice, at least in the United States.
Jared Woodard, Condor Options, @condoroptions: Mandatory retirement savings sounds better than what we have now. But if the underlying idea is that individual investors don’t always know (or do) best when it comes to raising money for their own retirement, then why only solve half of the problem? Forcing people to increase savings doesn’t solve the problem of average investors achieving below-average returns. Maybe pensions and some pooled risk weren’t the worst things, after all.
Wesley R. Gray, Ph.D., TurnkeyAnalyst & Empiritrage, @turnkeyanalyst & @empiritrage: I like the concept from an economic perspective, but I dislike anything that takes economic freedom from citizens–to include the freedom to decide how to save one’s money. Perhaps a compromise solution would be along the lines of libertarian paternalism (discussed in the book Nudge). The government would impose a default savings plan for citizens–so citizens will be saving by default–however, citizens would have the option to opt-out if they desired. This solution would facilitate economic freedom, but it would also encourage citizens with less foresight to save money for their retirement.
Thanks to everyone for their participation. Stay tuned for another question tomorrow.