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Mandatory Pension Savings: Should Employers And Employees Be Forced To Make Contributions?

Lewis Humphries

Given the numerous economic issues that have blighted the United States during the last five years, it is all too easy to forget that the current financial crisis carries global significance. Nations throughout the world are failing in their attempts to sustain long-term economic recoveries, especially as central banks continue to carry the burden of numerous financial bailout packages and the associated losses.

They are not alone in their plight, as individual consumers are also failing to accumulate adequate savings for their long-term retirements. According to a global report conducted by HSBC Group, which surveyed more than 15,000 respondents across 15 global markets, a growing number of consumers are facing up to the prospect of exhausting their funds beyond the expiry of state and employer pensions.

The Issue Facing Americans and the Proposed Solution
The data included in "The Future of Retirement: A New Reality" report offers a particularly telling insight into the challenge facing American citizens. The fact remains that those currently approaching state pension age could experience a significant fall in their standard of living during the final seven years of retirement, while also finding themselves in a position where they may be unable to afford additional costs such as long-term care. In more precise terms, while the average length of retirement in the U.S. is approximately 21 years, the typical citizen's savings are likely to last for just 14 years at present.

As a result of this, a mandatory pension scheme has been proposed that would force employers to put money aside for their employees' retirement. This idea has borrowed heavily from the current system operated in Australia, where employers are required to deposit at least 9% of each employee's salary into individual accounts. This applies to both full-time and part-time employees, and ensures that citizens are not reliant on state contributions as they progress beyond retirement age. Even though it is estimated that the U.S. budget deficit will fall to $642 billion this year, the federal government is still keen to ease its financial burden and emphasize the importance of saving.

An interesting feature of the Australian system is that the requirement for mandatory employer pension contributions has been phased in gradually. When the so-called "superannuation" accounts were first introduced 20 years ago, the main aim was to create a universal culture of independence among workers that encouraged them to participate in a long-term pension scheme. Over time, these individually owned accounts have flourished thanks to both employee and employer contributions, with the result that they now hold more than $1.6 trillion in assets.

Resolving the American Pensions Crisis: The Role of Workers and their Employers
If the pension crisis in America is to be resolved, it is crucial that the government adopt a similarly evolutionary approach. This would initially involve challenging the existing mindsets and circumstances of American workers, who are either unable or unwilling to participate in a pension or 401(k) plan. An estimated 58% of U.S. employees are failing to save for their retirement, while one third of current retirees earn at least 90% of their pension income from Social Security payments. While some would suggest that this highlights a lack of financial literacy and failure to appreciate the benefits of long-term saving, it is also a consequence of America's rising poverty levels.

Despite the numerous initiatives that have been established to fight poverty in the U.S., it is approaching its highest rate in 50 years. These figures have been swelled by a rise in the number of the working poor, who are defined as holding down full-time positions of employment but earning less than a living wage. When you consider that these individuals do not accrue adequate earnings or have the necessary opportunities for professional advancement, the idea of implementing mandatory pension savings suddenly becomes far more complex.

With falling unemployment rates being at least partially triggered by the creation of poorly paid or fixed-term jobs, this issue is likely to become even more prominent during the next 12 months. This will have a direct impact on addressing the failure to save, as the government cannot introduce a mandatory pension scheme if it is unable to create coveted job opportunities that provide adequate remuneration to workers. If it did, there would almost certainly be the need for stringent qualification criteria and exemptions to protect the interests of low-income individuals, which may in turn undermine the purpose of the legislation. Resolving this issue will also be key to introducing mandatory employer contributions in the future, as the responsibility for funding retirement must be shared equally between workers and the corporations that they represent.

The Bottom Line
The scale of the pension crisis in the U.S. cannot be denied, and the government is right to be considering potential solutions. Attempting to replicate the mandatory pension system that has been gradually implemented in Australia does not necessarily provide the answer, however, as the growing number of working poor in America simply cannot afford to set aside money for their future retirement. Any mandatory pension plan must start with a direct contribution from the employee, and the nation's political leaders must ensure that workers are earning a viable wage if they are to encourage a savings culture.

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