Tuesday, February 15, 2011

They're Too Stupid

Matt Yglesias posts a comment by Felix Salmon:
Just because you have a 401k plan does not, ipso facto, make you an investor. This is a serious problem with defined-contribution pensions in general: they place an onerous set of responsibilities onto individuals who are wholly unqualified to discharge them in a sensible manner.

Matt then writes:
The basic idea of Social Security—a slightly redistributive defined benefit pension with a capped contribution level—is actually a really good vision of how middle class people should pay for retirement.

Seriously think about what they are saying here:
People are too stupid to plan for the future. Therefore, the government should institute a pay-as-you-go transfer system to provide retirement for people.

FLG might even concede that people are their own worst enemies when it comes to retirement savings. But you have to ask yourself, if this is your position, if people are too stupid, or wholly unqualified if you prefer the euphemism, to save for their own retirement, .i.e save for the future, then shouldn't the government do a whole host of other things? Yes, yes, a progressive might say. Okay, says FLG, then if people aren't qualified to save for the future and a whole host of other activities, then perhaps, just maybe, they aren't qualified to vote. Think about it for a second. If people are supposed to vote after a careful weighing of all the issues facing the country, including finance and economics which they apparently are too stupid to understand, then they are too stupid to vote.

Doesn't this then necessitate some sort of massive technocratic, bureaucratic state where experts, however they are determined, in their various fields make the decisions for us mere mortals who are incapable of understanding anything beyond the drool dripping from our mouths onto the lip of the warm, half-empty Natty Light can resting on our wife-beater covered beer belly?

6 comments:

nadezhda said...

Slow down and take a deep breath. Then take a big step backwards and remember the lessons of Pension Systems 101.

The ideal retirement system is a three-legged stool: (1) a modest safety-net floor for everyone, (2) an earned pension that varies depending on one's lifetime earnings but where the risk of not seeing the pension is minimal, and (3) personal savings, where the individual does all the planning for how much to save, makes all the investment decisions, and takes all the risk. Neither Leg 1 nor Leg 2 should be so generous as to create disincentives for people to save for Leg 3. But we also have a public policy interest that Legs 1 and 2 be large and reliable enough to catch folks from falling through the cracks if Leg 3 turns out not to be there when it's needed (whether due to health problems, a bad market, etc).

In the US, we've been rapidly pushing the entire risk of Leg 2 away from employer-sponsored defined-benefit plans (where risks like market ups-and-downs can be bundled, spread and smoothed) and onto individual employees, who have no such risk mitigation mechanisms. When we do that, we should have products that are suitable for a large population of unsophisticated decision-makers to replicate, as close as we can, what Leg 2 is supposed to achieve. That means products which make it more straight-forward for the ordinary person to manage and limit risk.
[cont'd]

nadezhda said...

[2 of 2]

We know, because we have lots and lots of evidence, how easy it is for even "sophisticated" people to be sold a bill of goods, or have their brokers churn their accounts, or rush into markets at the top. (There's a reason brokers love big accounts they call dumb money.) We know, because we have lots and lots of evidence, that the greater the number of choices of product the more the finance industry pockets in sales commissions and fees. We know, because we have lots and lots of evidence, that people don't make a decision to save (even to get an employer's matching contribution) if they have to check 'yes' but do if they have to check 'no' to opt out. And so on, and so forth. These are facts.

Yglesias added that there's no particular wider socio-economic benefit in terms of having lots of small "investors" via complex products -- either for the typical individual investor or for improving information in the marketplace.

So, ideally, a rather simple set of investment options for Leg 2 would produce a reliable, relatively low-risk pension payment stream with low sales and administrative fees. This would be the appropriate policy outcome as the world shifts from defined-benefit to more portable but higher-risk defined-contribution plans for Leg 2. (And, btw, that ongoing shift is one of the reasons why 'privatizing' Leg 1 is insane for anyone but the financial services industry which covets new fees.)

You can save as much or as little as your heart desires, and invest in whatever you want to, with your personal savings, which no technocrat has any interest in interfering with.

S. Petersen said...

Eve's sin, or at least a critical aspect of it, was believing she wouldn't take responsibility for her own willed actions. That's the theme of Liberalism and Modernism: we're helpless, souless bits and deserve every bit of comfort and ease we can get out of the world.

FLG said...

Nadezhda:

The three legged stool makes sense intuitively because it is about not falling on your ass, which in this case means, and as you yourself identified -- sharing risk.

So, the government takes risk to provide a "safety-net floor for everyone," employers take the risk of providing a pension, and individuals top it off and take all the risk.

Looking at it from that perspective, much of what you say makes sense. Moreover, I don't dispute that people can make bad investment decisions, including not to invest when free money is on the table.

However, the financial risk sharing is somewhat illusory. Ultimately, the individual bears the risk for their retirement. They're just trading financial risk for legal/political risk. Corporate pensions have failed, and even though there's the PBGC, people have taken a hit. Similarly, social security benefits can and probably will be reduced, somehow, someway.

I'd far rather try to diversify away as much as I can myself, not after a good chunk of my potential savings have already been diverted for my own good, but using all of it, rather than leave than pseudo-transfer the risk. However, I'll freely admit that I do know a tad more about finance than the average person, and given that we all want old people to maintain their dignity, some socialization of risk is probably in order. But I still don't like it.

Although, I do want to mention that I focused on risk, until the end. Saying people are too stupid to do stuff, and therefore the government ought to step in is a very dangerous road to travel. And to be honest, Matt pulls the whole cliched progressive government knows better angle all the time. So, this was a large bit straw:camel type thing. But I still don't like it.

S. Petersen:

I don't disagree. Well, I do on the Modernity part. I believe Machiavelli marks the start of Modernity, and he doesn't sound like he wants us helpless:
I compare [Fortune] to one of those raging rivers, which when in flood overflows the plains, sweeping away trees and buildings, bearing away the soil from place to place; everything flies before it, all yield to its violence, without being able in any way to withstand it; and yet, though its nature be such, it does not follow therefore that men, when the weather becomes fair, shall not make provision, both with defences and barriers, in such a manner that, rising again, the waters may pass away by canal, and their force be neither so unrestrained nor so dangerous. So it happens with fortune, who shows her power where valour has not prepared to resist her, and thither she turns her forces where she knows that barriers and defences have not been raised to constrain her.

nadezhda said...

Yeah, I figured part of it was camel:straw, which is why I recommended taking a deep breath.

On the broader policy issue, however, it's important to be able to take a 30,000 ft view and look at the system as a whole and how its constituent parts work. Which is why I went back to first principles of Pension Systems 101, which it seems to me serves as at least a benchmark against which changes to each of our three legs should be assessed. Taking into account not just personal preferences but what we know about behavioral economics and the (dys)functions of the financial services industry.

J. Otto Pohl said...

A political dictatorship combined with an extensive welfare state does a lot to describe the Soviet Union in the post-Stalin years. People voted, but the votes were meaningless and the government provided almost all employment as well as a host of social benefits. Among them guaranteed prices on staple goods, education, health care, pensions and other benefits.

Of course the government also controlled the press and severely punished dissent. I had heard that the technocratic policy wonks of the 1950s and 1960s drew a lot of their inspiration from Lenin's idea of a vanguard party. So maybe progressives are aiming for a more benevolent vision of the USSR with a Swedish standard of living? If Khrushchev's reforms had succeeded maybe many of the "progressives" today would actually be communist party members? The anti-democratic and strongly anti-populist tendencies of "progressives" seem to point towards some sort of dictatorial welfare state and the USSR was by far the most successful of these type of regimes.

 
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