Wrong Place To Start
A national retirement “policy”
I’M INSTINCTIVELY opposed to any policy that authorizes
the people in group A (say, federal bureaucrats and retirement
policy wonks) to tell people in group B (say, working Americans) what to do. Basically, a national retirement “policy” does
more or less that—either by compulsion (something like the
healthcare mandate for pensions), incentives (e.g., tax incentives) or cajoling—“making” American workers save “more”
Notwithstanding my instincts, I think a special case can be
made for such a policy.
Behavioral economists have documented what is, really, a pretty
intuitional idea for most people—human beings care more
about consuming today than saving for tomorrow. The experts
call this “hyperbolic discounting.” This notion is fundamental
to the concept of the “time value of money”—basically, you
have to pay people to save. That is what interest is.
Now, of all the things in the “future” that people hyperbolically
discount, retirement is (with, perhaps, the exception of death)
the most “in the future.” It’s the last thing that will happen and,
in a sense, it’s the last thing people care about. So, we humans
have learned, after thousands of years of experience, that, left
to their own devices, people (e.g., working Americans) generally
won’t save, or at least won’t save enough, for retirement.
That little word I snuck in—“enough”—is, of course, the
problem here. Because, what exactly is enough? As I said in my
last column, I don’t think the issue of “enough” (aka adequacy)
is the right place to start. I think we should start with the question—who is going to pay for it (an adequate retirement income)?
Here are three different answers to that question. Answer 1:
the working American must pay for it out of his own wages.
Answer 2: someone else must pay for it, e.g., rich taxpayers.
Answer 3: employers must pay for it. This is really just another
version of either Answer 1 or 2, but it is such a pervasive first
choice that it’s worth singling it out.
Returning to our issue of what is “enough,” it is another
feature of human nature that, if your answer is anything other
than Answer 1—if someone else has to provide this benefit—
then what is “enough” will get bigger and bigger. Indeed, it
seems that enough can expand infinitely.
An approach that does not include a significant element of
self-funding—where the employee pays for his own retirement—will lead us down the path of an infinitely expanding
“enough.” We can see right now where that leads—in Greece,
they are burning down their country because they will not be
allowed to retire at age 45.
Our current system is a blend of all three answers. Economists (I
think, rightly) view the entire Social Security tax as paid by the
employee. All employees, high- and low-paid, pay at the same
rate. Benefits are, however, progressive—low-paid employees get
a benefit that is a higher percentage of earnings. Thus, Social
Security contains elements of Answer 2—taxes paid by high-paid employees go to pay the benefits of low-paid employees.
The private retirement system—DB plans, 401(k) plans, etc.—
generally look like Answer 1; that is, benefits are viewed as part
of wages and, in effect, reduce cash wages. The system of tax
incentives for these benefits can be viewed as Answer 2—that
is, American taxpayers are subsidizing the retirement savings
of those employees that participate in retirement plans. Alternatively, you may view the deduction for retirement savings
as a necessary mitigation of the tax on savings, in which case
the nondiscrimination requirements of the tax code actually
involve a subsidy of low-paid employee retirement benefits by
With apologies for having gone a long way into the weeds,
the takeaways are these: First, yes, we need a national retirement policy, because of the way humans (don’t) think about
the future. Second, that policy must impose on the individual a
significant responsibility for providing for his own retirement,
or we will lose all control of the notion of what is enough.
Michael Barry is president of the Plan Advisory Services
Group, a consulting group that helps financial services corporations with the regulatory issues facing their plan sponsor clients.
He has had 30 years’ experience in the benefits field, in law and