Economist's View: Mortgaging the Nest Egg

Mark Thoma sees people borrowing against their retirement accounts and worries about the future:

This is why I wonder about the long-term participation rate in "opt out" retirement accounts that are being promoted as a way to deal with the retirement security problem. How many people will opt out of these accounts when economic conditions for the household deteriorate temporarily for some reason? And once they opt out, will they opt back in? People who are motivated enough to borrow against their retirement accounts - almost one fifth in 2007 - would also be motivated enough to opt out of an automatic savings plan. Many of the studies, at least the ones I have seen, do not track people over long periods of time where this type of deterioration would be present, and they do not follow people through a recession when the pressure to opt out would be greatest. I'm not saying we shouldn't have these programs, they do help some people save, and even if some people opt out at least they have a source of funds to use when times get tough. The point, though, is that the people most likely to opt out are the very ones we would like to see participate in savings programs so that they have more than just Social Security available during their retirement years. Because of that, we should be careful not to place too much emphasis on opt-out types of mechanisms for solving the retirement security problem. These accounts may not provide as much of a boost as we hope to key segments of the population.

The idea of making 401(k) plans "opt-out" by default, rather than "opt-in", is a good one as far as it goes. But it's not clear how far it will go. "Opt-out" is a milder form of forced savings--call it "fiercely encouraged savings". I myself have been known to advocate forced savings as an antidote to the moral hazard problem: even if we eliminated Social Security, the feckless and reckless would know that we will not let them starve in old age; therefore, they will go about their merry ways in the expectation that the rest of us will take care of things later.

But there's a big problem with forced savings: it's not clear that it works as long as people can borrow. This is probably less of a problem with social security benefits, but it's not zero; a surprising number of seniors enter retirement with a lot of debt. And obviously, we're seeing that 401(k)s have this problem in spades.