Justin Fox on ‘why retirement risks are best shared’

November 10, 2013 at 12:00 AM EDT
Justin Fox, the executive editor of the Harvard Business Review Group and author of "The Myth of the Rational Market" has studied the Dutch pension system extensively. He discusses what aspects of the system -- mandatory savings, annuitized payments, national pools -- might work in the United States.

HARI SREENIVASAN:  So how different is the U.S. system versus the Dutch system?

JUSTIN FOX:  Well, the U.S. system started out after World War II a bit like the Dutch system — it was corporations providing pensions for people. And that kind of fell apart during the 1970s, although there are some corporations with pensions still out there and there are definitely a lot of state and local governments that give them. 

So what we switched to – is the Dutch put this emphasis on keeping it collective — having everybody in an industry in a pension together or some large corporations have their own pensions. In the U.S. when that system ran into trouble we moved into this totally atomized 401 K system where most people in the private sector are basically responsible on their own for saving for retirement.

HARI SREENIVASAN:  So what can we take away from that system that we could possibly institute here? 

JUSTIN FOX:  One thing that’s already happening is sort of automatically setting people up so that they save in an 401K. I think more and more employers, my employer Harvard University just announced this, that unless you tell them not to, they’re going to automatically start taking, I think it’s 3 percent of your salary initially, and putting it aside. And then increasing it every year by one more percentage point until you’ve reached statutory limit. And so that’s already happening out there. 

The other thing is on the payout end. Where here you retire at 65 and yea, you’ll get Social Security but you’re also likely to just to, if you did a good job and saved, have this big lump sum of money and have to figure out what to do with it. I think what a lot of people think is that it’s much more efficient to have people guaranteed income until they die rather than just a big pile of money. Because if I don’t know if I’m going to live to 100 or 75, I’m going to have to save a ton of money to live to 100. If you’ve got thousands of people all in the same system and it’s just guaranteeing a payout until they keel over that’s a lot cheaper. And there’s been a lot of pressure in the U.S. to have people annuitize their 401K but so far not many of people are doing it. 

HARI SREENIVASAN:  What is it that makes it so fundamentally unAmerican to be told forcibly to save versus having the option to save. Is it a cultural thing? Is it a psychological thing? Is it a behavioral economics thing?

JUSTIN FOX:  I think we force saving in the U.S. the bulk of the people were in this system just like the Dutch pensions did, People didn’t protest or march though the streets about it. It’s just that when that system started running into trouble — it had its limitations. One is that you couldn’t move companies and another was that if your company went belly up there was trouble. And now we’re seeing states and municipalities in trouble with their pensions. But we sort of switched to this default thing — the 401K — without any conscious choice ever being made to do it. 

HARI SREENIVASAN:  Does it solve the mathematical problem of how many workers will support how many retirees? 

JUSTIN FOX:  It doesn’t solve it no. Obviously if your workforce isn’t growing and your retirement force is growing  very fast that puts pressure on the system . All the people in the report, their concerns are real. But still we’re talking about slight decreases in how much they are going to get in the future and not not having any money for retirement. And actually the U.S. is in better shape with that because we’re a younger country, we have more immigration, we have a faster-growing workforce.