If you’re like most Americans, you don’t save enough. You know that, don’t you? At least, in those moments at 2 a.m. when you wake up thinking about it. During the day, more pressing worries take over -- the mortgage, car payments, young Michael’s travel hockey fees and prom season coming up for Sarah, plus your older brother is getting married for the third time and though things are tight, it looks like you’re going to need to put those plane tickets back to Ohio on the family MasterCard.
Steve Rattner thinks he has an answer to this: Force people to save. Mandatory contributions to retirement accounts, mandatorily invested in something a little more sensible than cash.
There are reasons to like this idea, for both liberals and libertarians. Libertarians can argue that the existence of a government safety net -- which, despite their best efforts, does not seem to be going away anytime soon -- encourages undersaving. People will be tempted to consume a lot of their income now, then fall back on the safety net if anything goes wrong. A mandatory savings program would end this moral hazard.
Liberals, on the other hand, can argue that many people, especially young men, are hyperbolic discounters: They value immediate rewards a whole lot more than anything that happens off in the hazy future, and so they are irrationally biased toward consumption. A mandatory savings program would correct this human foible, giving them a more comfortable retirement instead of a really nice television right now.
They might also argue that young families are increasingly victims of a collective-action problem with regards to spending on their kids. This is a bit more complicated, so let me complain.
As the premium on a college degree has risen, young parents in the middle class and above are under huge pressure to get their kids into “good” school districts -- which, after you strip away the chatter about curriculum and child-centered learning, boils down to a school district filled with the children of parents who were themselves academically high-achieving. Where do you find such school districts? In college towns and affluent neighborhoods.
Because most of us do not have the option of moving to a college town in the middle of nowhere with cheap houses but great schools, this means that most ambitious parents are caught in a bidding war with other ambitious parents for homes in those school districts. You would think that the supply would match the demand, but because income is unequally distributed among academic high-achievers and everyone would ideally like their kid to be in a school district where the average parent is slightly smarter than they are, this doesn’t happen.1 This dynamic is most pronounced in coastal cities frequented by the graduates of elite colleges.
The person who wins is the one who is willing to spend the most on a house. Who can spend the most money on a house? First: rich people. Second: people who are willing to cut spending in other areas.
Ever hear the advice to buy the worst house in the best neighborhood you can afford? I know a lot of 40-something parents who give (and practice) this advice. You get access to the best possible school districts by sacrificing something in the way of home amenities.
However, I hear a fair amount from parents who have tried this strategy and found that it’s not quite as cheap as they imagine. They carefully calculated their mortgage payment and how long they could live with the hideous '80s black-and-white kitchen. They forgot to factor in the special property tax assessment because the school district is overcrowded and a new building needs to be built. Or what all the add-ons would do to their budget in a town where the average household income is at least $100,000 higher than theirs. All the kids’ friends are on travel teams that cost thousands of dollars a year. The French class wants to go to Paris instead of a local French restaurant. It is theoretically possible to say no, but doing so means that your kid will be sitting home playing video games while their friends are out developing essay-worthy skills. Then everyone’s friends are going away to small liberal arts colleges and can you really tell yours to live at home for two years and rack up credits at community college before transferring to State?
What’s easiest to shortchange? Not the house -- you’re already in the cheapest house in town. Maybe the cars -- defiantly drive that 1992 Toyota for another 10 years. That still leaves a lot of parents in the hole, and what they choose to cut back on is retirement. The conundrum for responsible parents who want to get their kids into a good school and also save 20 percent for retirement is that the prices will be set by the most foolhardy. If one parent is willing to zero out their retirement contributions, they will set the price for homes in good school districts, leaving other parents with the choice of either doing the same or consigning their children to a less desirable school.
If retirement was mandatory, however, they could bid against other parents while also saving enough for their golden years. For a segment of the population -- not the majority, but a still-significant part -- this would be a great boon.
So you can make some good arguments for forced savings. However, you can also make some good ones against it.
The first problem to note is that it’s harder than you think to force people to save in a nation where credit is freely available. People can compensate by, say, taking on more long-term debt. Or they can exit the legal labor market. The income distribution of those two strategies may be different, but they will both work against you.
The second problem is finding investment opportunities for the money. We seem to be in a bit of a savings glut right now. Rattner estimates that his plan might produce net investment assets of about $25 trillion -- about twice what Americans now have in retirement accounts. That’s a huge amount of capital. Where shall we park it?
In a lot of other countries, the answer is “the U.S.” Because they are small relative to us, this strategy works pretty well. In the U.S., it might drive down the return on investments quite a bit. The U.S. stock market now has fewer companies than it did in 1950, thanks to consolidation and regulation, which makes it unattractive for relatively small firms to go public. That means a lot of money chasing basically the same amount of stock.
I saved assiduously in my early 20s, and that money has basically done nothing, adjusted for inflation, because of the 1999 stock-market crash, then the 2008 crash. That’s the perennial risk of pumping a lot of money into a market. It won’t happen all at once, of course. But it is a potential problem for the future.
The third problem is what to do with the money when people turn 65. Do we let them have it all at once? The moral hazard returns -- people can spend all the money and then fall back on the safety net. Do we limit withdrawals to an annual amount pegged to life expectancy? What if they want to buy a retirement home or blow it all on a trip to Europe before their aggressive cancer kills them? We could force them to annuitize it, but that’s rather hard on folks who die young.
The fourth problem is political. To name just two problems: People at the bottom of the income scale are not, by and large, victims of collective-action spending. If you take 10 percent out of each paycheck, they will run into immediate, often catastrophic, financial trouble. Toward the middle and the top, if you limit annual withdrawals, a lot of this money is going to end up with nursing homes. Good for the nursing homes, and for the budget, because most of that money is now provided by Medicaid. But seniors are going to be very, very angry that they saved their whole lives to give the money to a nursing home. Yes, this is irrational, there are tax savings, any objection you make will be true -- but they will still be irate.
The fifth is demographic: Social-security systems encourage people to have fewer children, because they don’t need someone to support them in their old age anymore. The problem is that, economywide, we still need the kids to create the income that supports people in retirement. Importantly -- and too rarely grasped by free-market advocates -- this is true whether the money is redistributed via government transfer, or by capital gains and dividends. A stock certificate does not create any more value than a social-security check does; both represent claims on wealth created by someone else. If there are too few someones, the standard of living goes down no matter how assiduously we have “saved.”
You’ll notice that we haven’t even touched on the morality of the state telling someone how they have to spend this money. I think there are good arguments that this is wrong, and we shouldn’t do it. But those arguments are long and thorny and will never be considered valid by half the population. So let’s leave them aside and concentrate on the practical, which is that while this solves some small problems, notably the collective-action problems of parents in expensive urban areas, it doesn’t really tackle the larger one: As education and retirement mean that people expect to spend less and less time in the workforce, how can we make that financially possible? I’m not sure that it is financially possible -- but if it is, I doubt that forced savings will get us there.
1 Actually, the strategic landscape is somewhat more complicated, and there are alternate methods where you try to make your kid the top student in a slightly-less-elite school, but this is the basic mechanism and most common strategy.
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