ONE STARK trend of the last two decades has been the dwindling number of companies that provide traditional pensions. Defined-benefit plans, which commit employers to paying a specific monthly stipend to their retirees, have increasingly been replaced by 401(k) plans at larger companies, while many other businesses offer nothing at all to help employees prepare for retirement. And even when workers do participate in such a plan, the burden is on them to put away enough for their future needs. In practice, there’s often a large gap between what most people have saved and what a comfortable retirement will require.
One promising solution lies in the mandatory enrollment of every worker in special savings plans. Other countries confronting similar problems have tried out plans along the same lines. Some countries require employers to set aside a certain portion of an employee’s pay. Other times, the responsibility falls on the employees or requires contributions from both.
Regardless, adopting a similar strategy to address the looming retirement shortfall in this country will require both ends of the political spectrum to defy their basic instincts. Liberals will have to recognize that new retirement savings can’t come by simply demanding that companies fund retirement accounts at their own expense. Conservatives, meanwhile, need to recognize that most Americans simply won’t save enough if left to their own devices. Instead, public policy must push to have a greater proportion of current compensation placed in retirement accounts.
“Most employers say, ‘Look, my budget says I can only pay this much in total compensation and also remain competitive,’ but they are reasonably amenable about how they pay that out,” notes Francis M. Vitagliano, a visiting scholar at Boston College’s Center for Retirement Research.
The first goal would be to encourage firms that don’t have 401(k) plans to offer them. Many small companies decline to offer such plans because the paperwork can be burdensome and choosing which investments to include can be difficult. The best solution, notes Vitagliano, is to make it much simpler for financial service firms to offer multiple-employer plans. That would let small companies participate without taking on burdensome administrative chores.
Meanwhile, workers need more nudging. It’s often left up to them to decide whether to participate in 401(k) plans. If, however, companies automatically enroll new employees in those plans and then allow them to opt out if they want, the participation rate will be higher.
But because dollars diverted to retirement savings will mean less take-home pay — and thus could discourage employees from participating — when a company first adopts such a plan, the automatic set-aside for its existing employees should start small. Those set-asides should then ramp up with yearly raises to a level high enough to provide sufficient retirement savings.
Contentious as these changes may be, promoting greater savings shouldn’t be as divisive as the debate over budget cuts and entitlement reforms. If both parties could come to agreement on a few basics, it could pave the way for real progress on a thorny issue.