Too Many Choices
Cafe Hayek
In yesterday's Washington Post, Sebastian Mallaby, who writes beautifully on trade, wrote about the morality of Social Security and the trouble with having too many choices under a private retirement system. He begins:
The economics of Social Security privatization get plenty of attention: how to think about transition costs, the effect on national savings, the risk of equity investment. But the political philosophy of privatization is often taken for granted: It's just assumed that, if the economics were neutral, people would be happier with private accounts than with a public program. Do we really know this to be true? Is an "ownership society" preferable to a "big government" one?
People want control over their lives; they value their freedom. But the first reason to wonder whether "ownership" is always good is that it can be stressful. It may be true, as promoters of ownership like to say, that nobody ever washed a rented car; but renters are very happy not to have to get the hose out. If it's up to you to choose how to invest your pension account, agonizing over health stocks vs. Asian bonds may not be such a privilege.
I doubt that what will pass for privatization that comes out of the big sausage factory on the hill will allow us to take a chance on Asian bonds. But never mind. He has a good point. Ownership is stressful. So is deciding where to go to college. So is figuring out who to marry. So is being an adult. But it turns out that being free to choose may not be the deal some of us might think it is:
It's not just that financial planning is a dry topic to most folks. It's that modern life is overloaded with choices. In "The Paradox of Choice," the Swarthmore College psychologist Barry Schwartz shows how a certain measure of choice can be liberating but how too much is a treadmill -- sometimes even triggering depression. Freedom and choice are wonderful things that allow us to realize our human potential. But there's a limit to how many choices each of us has time to make, and most people in the rich world are pretty much maxed out already.
You see this truth in the behavior of the affluent, who actually pay to avoid choices. They hire home decorators so they don't have to stare glassily at 200 kinds of curtain rail. They hire marriage planners so they don't have to fret about cream napkins vs. white ones. There are said to be 10,000 wedding consultants practicing in the United States. If the rich are deliberately avoiding choice, why are we so sure that the majority want more of it?
Yes, there are times when all of us have trouble making decision. And yes, there are times when all of us ask for help, either from experts or friends to help narrow our choices. But what are the policy implications of this anxiety? Boy, there sure are a lot of news sites on the web. I can narrow them down by bookmarking the ones I like. I can narrow them down by using Google news. Is there anyone out there who wants the government to pick my bookmarks? Or limit my access to all those web sites? There are a lot of stocks out there and right now, I actually invest in some of them. I use something called mutual funds to simplify the range of choices and reduce my risk. It's not perfect. There's risk. I might be in the wrong funds. But would I want there to be fewer choices so I woudn't have to worry as much? Mallaby is worried about the risk issue:
Ownership does not merely involve choice; it involves risk also. A certain measure of risk is fine; indeed, if you want a dynamic society it's positively essential. But just as the modern economy threatens Americans with choice overload, so it also piles more risk on the shoulders of the average citizens. The risk of not being able to afford health care has risen, albeit because health care has more to offer than it used to. Fewer people have risk-free "defined benefit" pension plans that guarantee a fixed proportion of salary upon retirement. An index devised by Yale's Jacob Hacker shows that income volatility has increased sharply since the 1970s. Given that risk is already on the rise, perhaps public policy should avoid adding to it?
Maybe because they want some insulation from the uncertainty of the market, people sometimes prefer government solutions to private ones, even if they are no more efficient. In Britain, a study led by Michelle S. Mahoney of the University of Exeter found that people were satisfied with the privatized water distribution system but still thought it ought to be run by the government. In Michigan, Lyke Thompson of Wayne State University surveyed attitudes to 14 different services; a majority of respondents favored government provision of 10 of them. Jonathan Baron, a University of Pennsylvania psychologist, has surveyed attitudes on government provision, private provision and various intermediate subsidy options. He finds that people tend to want government to do the things it's doing now. They don't favor more big government, but they don't favor less of it either. They are against privatizing Social Security.
I wonder who "they" are. I wonder how the question was asked. It's a piece of cake for a decent survey designer to get any answer you want on privatizing. The real issue with privatizing is, unfortunately, "what's in it for me." If you think you're going to get more money, than most people I suspect, are for it. If you think you're going to get less, you're against it. I doubt most people are afraid of the opportunity in and of itself.
Here's the question I'd like to ask of people who currently invest and save on their own. How would you like to add to your social security contribution instead of investing in your current portfolio? How many of them would answer by saying, "it's hard enough to invest on my own—I love that the government makes it easy by taking my money and giving it to today's old people. That way I know I'll be taken care of when I get older because they can tax my children and the children of strangers." Does the current system really make my life less stressful or less risky?
And if you're worried about all that stress, there is a very easy policy solution to let those worriers sleep easy. Make social security voluntary. You don't like making your own choices. Let the government handle it. Opponents of privatization usually take this as a mere rhetorical thrust. But why not make it voluntary? Oh, it wouldn't work, say the skeptics. The reason it wouldn't work is that nobody would sign up for it. Or not enough. And then you wouldn't be able to do the redistributive stuff that is the real raison d'etre of the current system.
Mallaby closes:
What to conclude from this discussion? The fact that freedom triumphed over the totalitarian systems of the 20th century should not be read as proof that people want all freedom, all the time. The East Europeans who overthrew communism were escaping from an anti-choice extreme. But the American system, which features more risk and inequality than any other advanced society, is over at the opposite end of the spectrum. It shouldn't be assumed that Americans want to embrace individualistic risk more than they do already.
It follows that pro-market, government-cutting schemes cannot be justified by a presumed moral superiority. When it comes to their retirement, most Americans probably want a mix of a government safety net and the opportunity to accumulate their own savings. The current system, featuring a government program that guarantees a pension equal to about a third of the average worker's salary, plus a variety of tax-favored opportunities to save individually, may already be quite close to most citizens' sense of the right balance.
In the absence of the moral-superiority claim, a reform that adds to the stresses of the modern world must hold out the compensating hope of more prosperity. There's no case for Social Security privatization unless it brings a serious economic payoff.
The bottom line: if government doesn't take care of a piece of my retirement, I'm going to be a nervous wreck. The argument ignores the private mechanisms that will evolve to deal with the stress, such that it is, of investing: mutual funds, advisors, annuities, fixed-income options and so on. And I think Mallaby's last sentence has it exactly backwards. The economic payoff from privatization will be small. The real payoff is moral—the oppportunity to live as an adult, making choices and coping with the consequences, good and bad.
Ironically, what George Bush calls privatization will not be real privatization. What is called privatization is simply a mandatory government savings program where the vehicles for that saving will be highly limited to reduce that risk and stress that Mallaby and others are worried about. |
