psql below 9.2 does not accept this URL-like syntax for options.
The use of SSL can be driven by the sslmode=value option on the command line or the PGSSLMODE environment variable, but the default being prefer, SSL connections will be tried first automatically without specifying anything.
Example with a conninfo string (updated for psql 8.4)
psql "sslmode=require host=localhost dbname=test"
Read the manual page for more options.