You Gotta Eat Your Spinach

Just ask Shirley Temple:

You gotta eat your spinach, Baby,

That's the proper thing to do.

It'll keep you kinda healthy too,

And what it did for Popeye,

It'll do for you,

Meir Statman suggests an “eat-your-spinach” solution to retirement savings.  His solution, quite appropriate for one with his name, is for the state to force Americans to save, via a defined contribution plan:

It’s time for the U.S. to create a mandatory, defined-contribution plan, not unlike those in other parts of the world such as Australia or the United Kingdom.

He doesn’t believe that voluntary plans, such as IRA and 401(k) plans go far enough, because no one is forced to save:

“It’s time to switch from nudge to shove and replace libertarian-paternalistic voluntary defined-contribution accounts with fully paternalistic mandatory defined-contribution accounts for all….It’s a retirement savings solution centered on a paternalistic second layer of mandatory private defined contribution savings accounts in a retirement savings pyramid, above by the paternalistic first layer of Social Security and below the libertarian third layer of voluntary savings.”

So one paternalistic, mandatory plan (Social Security) where people are forced to save more than 15% of their income (including Medicare) is not sufficient; another paternalistic, mandatory plan must be created.

According to Statman, these mandatory savings accounts would be private accounts, much like current 401(k) and IRA accounts, except that they would be mandatory and unavailable before retirement age.

What does “private” mean if I don’t have authority regarding control, use, or disposition?

Savers, he said, should not really care whether the government forces them to save. They are going to save regardless. “Other than feeling oppressed because I now have to do it because the government said so, the effects other than ideology are zero,” he said.

Is Mr. Statman so naïve about the character of his namesake?  Setting aside all other issue of force and inaccessibility to the funds, does he believe the government will remain hands-off regarding the investment options?  Or is this merely an issue of “ideology?”

“But the effect on those who have a problem saving would be profound.”

Perhaps the government can offer a welfare program to solve the main problem for many who don’t save – a lack of savings.

And when Statman thinks about the retirement savings crisis in the U.S. it’s more about those who have no self-control. “For those who need a little extra kick, (my plan) forces them to save whether they like it or not,” said Statman.

But what if they don’t like it?  Perhaps they can be placed in prison?  Give up a pound of flesh?

“It’s hard to accept, but some people in our country are children forever in our country,” he said. “And in the same way that you would not let a 3-year-old cross the street on his own, you would hold their hand; some people need hand-holding until they are 70.”

They will certainly remain children if they are continually and increasingly treated as children.

Statman’s plan, by contrast, calls for mandatory savings with investment returns dictated by the account owner’s investment decisions, exactly how it happens with traditional 401(k) plans.

Wait a minute – they are children who cannot figure out how to save, but are wise enough to make their own investment decisions?  Don’t worry, the next Statman will come along and write a paper suggesting that these “children” be forced to invest only in the government-approved options.

“But the problem of retirement income is severe, and solutions must be identified, debated and implemented,” he said. “We don’t have to force people to eat spinach, but this is really important to leave to just people’s taste and education about financial nutrition.”

Please, stick to the spinach.  And use Shirley Temple as the muscle.