Arnold Kling

Pension Paternalism?

Arnold Kling, Great Questions of Economics
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Hal Varian makes a case for government restrictions on individual choice in pension investments, based on patterns of irrational behavior on the part of investors.

The tendency in the last several years has been to offer employees more choice of retirement options. But if individuals do not make good choices when left to their own devices, this may not be appropriate.

... Even extreme libertarians may be willing to face some restrictions on their retirement choices, so long as they won't be required to bail out fellow retirees who make excessively risky choices.

If nothing else, Varian's article is worth reading for its description of "self-regarding attribution bias," which is academic jargon for an egomaniac. Apparently, this is more prevalent among men than women, which gives men a higher propensity to gamble.

I disagree with Varian. I would like consumers to be able to make their own investment choices. The most that I am willing to concede is that the government could publish guidelines for safe investing, and people who choose riskier strategies can be informed that their savings plans fall outside those guidelines.

One problem with implementing my proposal is deciding on the guidelines. For example, although both would favor diversification, bullish James Glassman probably would advocate stocks more heavily than bearish Robert Shiller. Whose advice would be enshrined in the government recommendations?

Of course, the issue of what are the correct guidelines would become even more pronounced if the guidelines were hard-coded as requirements. Then the government not only would be giving investment advice but forcing people to take it.

Discussion Question. Do you think that individual investors take bad risks more out of ignorance or out of a desire to gamble? How might one's answer to this question affect your view about what policy interventions are appropriate?

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