December 20, 2004


Trouble With Choices (Sebastian Mallaby, December 20, 2004, Washington Post)

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.

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.

Which is why these accounts won't have many choices and will need defaults based on your age. You should be allowed to choose a different option, but the immediate decision should be made for you. And you should not have a choice about being shifted into the more conservative option as you approach retirement age.

Posted by Orrin Judd at December 20, 2004 5:53 PM

OJ: Actually, at present life expectancy rates, retirement funds are required to last 25+ years. Over that time horizon, getting overly conservative can be a recipe for 'going broke safely.' That is, of course, unless your beloved deflation holds true. Having a healthy exposure to equities isn't usually the killer -- it's people's unrealistic expectation of sustainable draw down rates.

Posted by: John Resnick at December 20, 2004 8:23 PM


Yes, the withdrawal date/retirement age needs to be pushed back at least ten years. Though, from what I understand you can allow people to opt out at the point where they can afford to buy an annuity that will pay them what SS would have.

Posted by: oj at December 20, 2004 10:15 PM

Don't all of those worries come after the decision to allow some choice? Any choice would be a step forward.

Posted by: jsmith at December 20, 2004 10:59 PM

And people who really really don't want to make a choice but want the same "safety" as current SS can alway put the entire account in T-Bills.

Posted by: ray at December 20, 2004 11:05 PM

'..Barry Schwartz shows how a certain measure of choice can be liberating but how too much is a treadmill -- sometimes even triggering depression'

I get depressed when I read ridiculous psycho-pap like that from Schwartz.

Posted by: JonofAtlanta at December 21, 2004 9:44 AM