Will new pooled pension plans boost retirement savings?
Despite the best of intentions, many people spend virtually all the money they have, says economist Richard Thaler, in his book Nudge.
Thaler believes that when faced with certain options, most people will consistently make the wrong choice.
Therefore, when it comes to something as important as retirement savings, all of us need to be coaxed into developing more self-control, willingness to battle procrastination and the ability to handle short-term sacrifices.
That’s tough to do. For most people, saving for a distant goal such as retirement is a challenge. Setting aside even a few dollars each month is difficult in the years of raising children and buying a home, when the need for cash is greatest.
As well, if saving requires effort, many people will simply avoid it. So, Thaler says, they have to have someone to do it for them — in this instance, their employers.
And that’s the thinking behind the government’s recent proposal to encourage small business owners to set up low-cost pension plans for their workers. And, if employees are lucky, put a bit of money towards the plan as well.
Here’s Thaler’s idea: Increase employee retirement savings by giving workers the option of committing to retirement plans now and then increasing their savings rate down the road, each time they get a raise.
If employees opt in, their contributions are increased beginning with the first paycheque following a raise until the contribution rate reaches a pre-set maximum.
Will you set up a new pension plan for your employees? If you're on the receiving end, will you stay with such a forced savings plan?
By Gordon Powers, MSN Money