By CNNMoney
Filed under: Retirement, Banking, Savings Accounts, Saving
By Kim Clark, CNN Money
Meir Statman, a finance professor at Santa Clara University, is one of the most influential experts in behavioral finance — the study of how your emotions and beliefs affect your decisions surrounding money.
Research in this field has led to a growing number of practices, such as automatic enrollment in 401(k) plans, intended to gently steer you toward smarter choices.
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In presentations to financial advisers, and in his 2011 book What Investors Really Want, Statman explores how people try to balance the conflicting goals they have for their investments — for example, earning top returns while reducing risk.
Statman, 65, has now started to question some of the behavioral finance dogma that has been the focus of his work. In a new paper, he argues that improving Americans’ retirement security may require something stronger than a polite nudge.
His conversation with MONEY senior writer Kim Clark has been edited.
You’ve studied behavioral finance for more than 30 years, and you’ve seen many efforts to nudge people in the right directions. Do they work?
Nudging is very useful. Lots of people were nudged into saving for retirement by making it automatic and adding automatic escalation of savings.
Fifteen years ago, I might have said that would do the job. I doubt it now, because I see almost two populations: one that can be nudged into retirement savings, and another that is resistant. For them, we need to go beyond nudge into shove, and make retirement savings mandatory. I’m reluctant to shove people. But I think half of us, maybe more, are in a crisis.
So what’s your plan?
It’s similar to a 401(k) except that it is mandatory instead of voluntary. Employers would administer it. For self-employed people, there would be something like the insurance exchanges in the new health care law.
How much would people be required to save?
We should set a relatively low minimum, say 8% of one’s income, satisfying pressing retirement needs. Ideally the level would be closer to 15%. That’s the range in other countries that have created mandatory savings plans, such as Israel and Australia.
This is on top of Social Security?
Precisely. You might ask, “Why not just expand Social Security?” but that is not likely to fly politically, and enacting my proposal would require a new federal law.
Social Security is an insurance plan more than a retirement savings plan. It is fair for us to insure one another against dire poverty and disability. It is unfair, however, to ask us to assure others of a comfortable retirement.
Your plan seems very paternalistic.
People would resent it today, but be grateful later on. God knows, we all can tell stories about stuff our mothers forced us to do that we resented …read more
Source: FULL ARTICLE at DailyFinance