Tuesday, July 29, 2008

Take this 401(k) plan and Shove it

Automatically enrolling employees in 401(k) plans is all the rage these days. The theory that the mass of people are too stupid or lazy to recognize what's good for them has been around for quite a long time in certain government and academic quarters. But, not surprisingly, this theory turns out to be unpopular with the people themselves (as well as with others in government and academic quarters who've seen how paternalism tends to pan out -- hence William F. Buckley's famous quote about preferring to be governed by the first 100 names in the Cambridge phone book than by the Harvard Faculty).

The paternalists are back now with a brand new idea: "We'll make people do what's good for them, but we'll let them opt out if they really want to do the wrong thing! That way, we can say we're preserving their freedom, but in truth we know that they're still too lazy or stupid to undertake the effort required to opt out of what we're making them do!" Hence, a new oxymoronic name: Libertarian Paternalism. And, hence, automatic enrollment in the 401(k) that you can nevertheless always cancel.

Exhibit A in the libertarian paternalism front today is a new book by Cass Sunstein and Richard Thaler, a law professor and an econmics professor, respecitvely, at the Univeristy of Chicago. Because goofy one-word titles are all the rage in nonfiction books these days (Blink, Collapse, Freakonomics) the book is not called "Libertarian Paternalism" but rather called "Nudge."

So, what's wrong with a little Nudge? Sure it's paternalistic, but hey, if you don't like it you can always opt out right? And I've heard some fairly smart people make arguments against libertarian paternalism that the Nudge authors have ready answers for. I won't rehash those here because I don't have anything new to add.

What I will say is that libertarian paternalism has long made me apprehensive even though I couldn't quite articulate why. Now I'm starting to get an inkling and it comes in the form of that old devil, the law of unintended consequences. The Wall Street Journal recently ran an article about the popularity (with regular folks, not with the paternalistic types) of 401(k) debit cards.(Click here, subscription required) It's always been possible to borrow against your 401(k), but it's a bit of a hassle. Now along comes a card that you just swipe, sign, and viola, you've just made yourself a loan.

Borrowing money from your 401(k) is crazy unless you really need to -- your just robbing yourself. But, according to the Journal, the availability of loans makes people more likely to join a 401(k) in the first place.

The bottom line for Thaler and Sunstein is that a theory is only as good as its practical results. Yes, you can probably get people to contribute to their 401(k) by automatically enrolling them; the laziness that keeps people from enrolling also keeps them from unenrolling. But it's not clear that this changes ultimate behavior. Will people just borrow more on credit cards because they figure they're in good shape for retirement? Or, will they be even more direct and just borrow right of the 401(k) you just put them in? No one knows this for sure yet, so it isn't game over for Nudge. But it's worth considering that the Journal article also mentions legislation that would ban 401(k) debit cards. For everybody. No opt-outs. That's not a Nudge, it's a Shove, and it's where paternalism has always tended to end up.

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