Should Saving for Retirement be Required?

It’s no surprise that it is difficult for Americans to save for retirement. Only roughly half the population even has any sort of retirement plan. One of the new proposals to get workers to save is an automatic IRA. Under this plan, as proposed in President Obama’s 2010 government budget, most employers that don’t already offer a retirement plan would be required to enroll their workers in a direct-deposit IRA. Employees could opt out if they choose. The existing saver’s tax credit would also be modified to provide a 50 percent match on the first $1,000 of retirement savings for families that earn less than $65,000 and be fully refundable.

“This is an attempt to try to achieve the type of universal coverage in retirement that we are hoping to achieve in health care,” says Mark Iwry, deputy assistant secretary for retirement and health policy for the U.S. Treasury and coauthor of the proposal. “You give the person a choice to save or not to save, but you put your finger on the scale to encourage them to save.”

The automatic IRA proposal is also sometimes referred to at the universal IRA, a term Dallas Salisbury, president and CEO of the Employee Benefit Research Institute, takes issue with. “It is not universal,” he points out. Some very small businesses would not be required to participate in the initial stages. "Most of the bills that have been drafted exclude employers with 10 or 15 or less employees subject to 2 years in existence, profitability for 2 years, and other factors," Salisbury says. "Much of the group of 75 million Americans without a [retirement] program at work would be excluded from most of those so-called universal proposals." And, unlike the Social Security program, individuals can opt out if they can’t or choose not to participate.

The default investment that workers would be automatically enrolled in has not yet been selected. Possible options include private sector lifecycle or target date funds, which contain a mix of stocks, bonds, and cash, or a new type of government savings bond, an R-bond. “For some people it would feel even safer to have a government security,” says Iwry. Some retirement experts think that once Americans begin to save through a government program they will become lifelong investors. “That is the incubator and then as soon as the baby is able to be taken out of the incubator then the private sector can take it home,” Iwry says.

Representative Cathy McMorris Rodgers, a Washington Republican, dislikes the idea of a savings mandate. “A system like this would only lower choices for workers and create a new bureaucracy in Washington, D.C.,” she says. “We should be looking at ways to incentivize employees to save more through the voluntary employer-based system.”

Richard Spiegelman, legislative director for Senator Robert Casey, a Pennsylvania Democrat, says Democrats may be more receptive to retirement plans where not all of the risks fall on individuals. “It sounds like a reasonable way to get people attending to their retirements sooner rather than later,” he says. Casey, however, says that health care reform is his first priority.

Tell us, should retirement saving be required?