In George W. Bush’s words, here’s why voluntary personal retirement accounts are a good idea: “Your money will grow, over time, at a greater rate than anything the current system can deliver — and your account will provide money for retirement over and above the check you will receive from Social Security.”
But, so far, Americans just aren’t buying it.
Today, the Los Angeles Times’ Peter G. Gosselin offers us a clever take on the perils of private investing from some folks who might just be a bit savvier than Joe and Jane Sixpack: Recent Nobel laureates in economics.
Granted, these guys (yeah, they all happen to be men) didn’t win the prize for their abilities to balance their checkbooks or to offer hot stock tips. But we expect that they, unlike many of us, may glance at the Wall Street Journal every now and then, and have a passing familiarity with economic trends and investment strategies.
So, how would they fare if they, instead of Uncle Sam, were investing their retirement funds? Gosselin asked.
Several of them concede that they have significant portions of their nest eggs in money market accounts, some of the lowest-returning investment vehicles available.
“I know it’s utterly stupid,” confessed George A. Akerlof, a UC Berkeley professor and 2001 winner of the Nobel Prize in economics.
In regard to investing, the economics laureates are a lot like most Americans, writes Gosselin.
[A] growing body of research shows that millions of Americans fail to get even the most elementary investment decisions right.
More than one-quarter of those eligible for employer-provided 401(k)s fail to sign up for them, according to the Federal Reserve. More than half of those who do sign up funnel their money either into overly conservative or overly aggressive investments, according to the Employee Benefit Research Institute, a Washington think tank sponsored by hundreds of companies.
Even more disconcerting, new research suggests that most people don’t behave anything like the economically savvy men and women that free-market advocates and economic theorists claim they are. They often shut down in the face of many choices. They sometimes even fail to go after free money.
Typical of the lot is 2002 Nobel winner Daniel Kahneman of Princeton, who told Gosselin: “I think very little about my retirement savings, because I know that thinking could make me poorer or more miserable or both.”
Gosselin offers some insightful comparisons, based on Bush’s plan.
Under the proposal, Americans born in 1950 and after would be able to divert a portion of their Social Security payroll taxes into individual investment accounts. But in return for doing so, their traditional Social Security benefit would be reduced — by the amount diverted plus a 3 percent annual after-inflation charge on that amount.
With inflation now running about 3 percent, that means account holders might have to earn 6 percent a year just to break even.
Money market accounts are now paying about 2 percent, notes Gosselin.
Although the president’s Social Security plan has built-in safeguards, writes Gosselin, “most Americans recognize the dangers the protections are intended to shield against.”
“We have a lot of people out there with 401(k)s who have never managed an investment in their lives and are just trying to keep themselves from drowning,” said William F. Sharpe, a Stanford finance professor emeritus who shared the 1990 Nobel with [Harry M.] Markowitz and Merton H. Miller and founded a company that offers to make people’s retirement choices for them.
“I suspect if you asked them, they’d say: ‘I’ve got enough trouble; I don’t want to screw up my Social Security.'”
Gosselin offers the flip side to the message emanating from the carefully controlled town hall meetings on Social Security staged by the White House over the past two months. Using self-effacing Nobel economists to tell the story of a baffled public utterly at sea in the world of investment choices is an ingenious touch.
–Susan Q. Stranahan
Susan Q. Stranahan wrote for CJR.