This morning, I went along to a business conference where the subject was on the issue of pensions (eyes suddenly glaze over, loses will to live, please when can I leave? Etc). One of the speakers was a certain Adair Turner, the man who, between 2003 and 2006, was chairman of the Pension Commission, a government-created body of the Great and the Good given the task of figuring out how to sort out Britain’s creaking pensions system – a big topic.
In his comments today, Turner spent a bit of time talking about what is known as ‘behavioural economics’ and how it shows that, far from being a utility-maximising creature, Man, often as not, behaves irrationally in ways that can be corrected with a spot of gentle paternalistic direction. In the case of pensions, many people simply do not save enough money to cover their old age, even if they know they should, so the argument goes. Other things, like paying off the credit card, or refurbishing a house, or paying for a new car, get in the way. As a result, Turner says we need to compel people – nicely of course – to sign up to pension schemes so that they do not become a burden on the future taxpayer. It is an approach that has in the past been dubbed ‘soft paternalism’ because it is borne out of the idea that economists and other supposedly clever people know better than we benighted citizens how we should arrange our affairs. It is not exactly out of the Ayn Rand handbook, is it?
I have several problems with this way of thinking. First off, if we are so lazy, short-sighted or plain thick to run things like our long-term savings, isn’t that rather corrosive of the idea of a nation of free citizens with the right to vote in elections? If a person is deemed incapable of saving for his dotage, should he be allowed to decide which careerist should get the keys to 10 Downing Street or the White House? Are we not endorsing a sort of elitist model of governance in new, supposedly scientific, garb? I think we are.
Soft paternalists also perhaps lose sight of why many people are so short-sighted in affairs such as planning for retirement. Over the past century, the Welfare State, and the associated rules and regulations over the private sector, have created a pensions saving system of horrendous complexity, way beyond what should be needed. Politicians have created this monster, so they should hardly then claim that even more intervention is needed to allay the public’s fears. Even the financially savviest citizen faces a forbidding task in trying to work out the best option for savings, even before they have grappled with the latest investment ideas, such as private equity, hedge funds, or whatnot. If one then realises that private savings and the incentives to save have been eroded by things like means-tested benefits and the Welfare State, it is perhaps not surprising at all that many modern Britons are supposedly incapable of thinking about these matters, let alone acting on the calls to save.
What I find depressing about the soft paternalist mindset is how little historical perspective it involves. 150 years ago, Britain was already well on the way to enjoying a vibrant and widening market for personal saving and investment through the existence of groups such as Friendly Societies (these were the precursors of the modern mutual insurance and life firms, and some of the names still carry old historical references, such as ‘National Mutual’ or ‘Friends Provident’). This web of saving vehicles, covering even poor industrial workers in Victorian Britain, was fatally weakened by the Fabian socialist thinkers and politicians before and after the First World War. ‘Liberal’ politician David Lloyd George, and many others, fashioned a welfare and pension system that eventually drove the old Friendly Societies out of the primary business of providing for old age and sickness, or at best, to the margins.
There is a positive and negative circle at work in this area. If you stifle the ability to acquire private savings, it means that you hamper also the accumulation of a deep and rich soil of self-reliance, responsibility and individual financial know-how.On the other hand, the more that people learn how to save for old age and see their parents doing this, the more confident they become, the less they fear independence and hence resist the easy charms of Big Government. The social and cultural consequences of Victorian mutualism and the subsequent decline have been well-documented by writers such as Ferdinand Mount, David Green of the Institute of Economic Affairs, and James Bartholomew.
So the next time you hear a policy wonk or newspaper writer chiding the feckless ordinary Briton for not saving enough, remember that Victorian statesmen like William E. Gladstone were so moved by the thrift and savings culture of industrial Britain that they became convinced that the humblest factory worker was entitled to run their own affairs. A bit of Gladstonian wisdom would not go amiss now. Soft-paternalism may sound nice and cuddly, but the long-term side effects are a steady weakening of positive financial habits.
It’s very annoying to see this misappropriation of behavioural economics by statists. Like all economics, behavioural economics seeks to model and perhaps explain phenomena based on assumptions. If different assumptions about people’s decision making leads to better models then that is well and good. And if experimental studies show that people sometimes make ‘inconsistent’ decisions then that is also well and good. But to pretend that such evidence has been modeled in a way as to provide a guide to policy making is wholly wrong.
For a start using this stuff to look at pensions assumes that these guys have an objective definition of rationality across time. This is such a preposterous claim that there really isn’t much I can say about it.
Even if they did have such a definition how they assume to know the information underlying our financial decisions leaves me stumped. Maybe I’m just not clever enough for these people.
Personally I’m selling everything now and spending the cash before Hurricane Gore (due 2020 approx.) destroys London and all my assets.
Well, hello again Johnathan. So it’s “Soft paternalism is still paternalism”.
I’m somewhat concerned about that word, though it is not my choice. As you doubtless realise, this is because, down here on another of your postings, I was defending a position that was labelled as paternalism; or rather as “paternalistic tosh”.
As one of my personal attributes is to be seriously defensive of my own position, and another is to seek the general out of the specific, but also being aware of the danger of equivocation, I was just wondering if your “paternalistic” here is close to Tom Morris’s “paternalistic” there.
If so, I’ll engage. [But please don’t do an unexpected wimp along the lines “it’s in the eye of the beholder”; that would be no solution to the problem of equivocation.]
Best regards
Rational subjectivism at its worst. Of course humans are irrational. However, it is a leap of mammoth proprotions to then say that this completely negates the desire of humans to maximize long-term utility.
Of course humans are irrational.
Well, each of us can point to someone else’s actions and claim they are irrational. But from the perspective of that someone, his actions are entirely rational; and he may reciprocate about your “irrational” actions. Who is correct? Hard to say, but ultimately history indicates that it is the one with the most guns.
Adair Turner is a product of the very same managerial class that has destroyed people’s trust in saving for the future.
For him – and anyone else in the laughably self-styled ‘financial services industry’ – to whine that we no longer trust them when they, and government after government, have swindled so many out of their life savings would be funny, were it not so nauseating.
Johnathan
It would indeed be a coma-inducing topic were it not so serious.
However much i dislike the state forcing its citizens to act in a certain manner, on this issue i can see the benefits of compulsory pensions.
Put simply, most people are too ill-informed and think too short-term to plan effectively for their future. (They are also most definitely too simple to vote but that is another matter). The burden then falls on those of us who do plan to bail out those who don’t.
Libertarians will counter that people have become used to the state bailing them out and hence lose the ability to look after themselves. This is true to an extent. But the state pension is pitiful. You simply cannot live on that alone.
In Australia, pensions are compulsory (as, interestingly, is voting). They are also wonderfully tax-efficient and simple. As a result, people do save for their retirements and the burden is reduced for the rest of us.
Sometimes pragmatism triumphs over ideals.
btw – pensions remind me of a good actuary joke (an oxymoron?).
How do you tell an extrovert actuary?
Someone who looks at your shoes whilst he’s talking to you.
There are two distinct fallacies being peddled in this situation that are at the crux of the problem with these government forced-pension schemes.
(God, I just love the British usage of the term “scheme” to describe this kind of program. I remember my surprise the first time I heard it, thinking, “Wow, they actually admit it’s just a scheme to get people’s money.” Of course, it really wasn’t that forthright…)
First is the idea that the great majority of people are helplessly inept when providing for themselves and their families, and that the elderly, in particular, are routinely impoverished.
In fact, it is precisely the ordinary middle class person in western society who is responnsible for operating the businesses, providing the services, and doing all those things, big and small, that keep a multi-trillion dollar global economy functioning. If some of them do it well enough, whatever it is, they move up in to the upper income groups where, presumably, they become even more capable of handling their money.
One of the most blatant acts of inter-generational theft in history is the ongoing removal of hundreds upon hundreds of billions of dollars from young working families to fund the enormous pension and medical programs for seniors, many of whom have extensive holdings in real estate and other investments.
The idea that the pension funds are being held or invested for current payers old age is ludicrous, as any moneys collected are quickly payed right back out again to satisfy the ever-increasing costs of present day retiree benefits.
If any private company started such a program, based on exactly the same movement of moneys, the organizers would be immediately arrested for perpetrating a fraud. It’s a Ponzi scheme, and everybody knows it, they just try to pretend it’s OK becase it’s for the elderly.
Secondly, and, perhaps, even more importantly, there is a specific attempt to justify programs like this on the basis of their alleged beneficial outcomes. It is alright to compel people in this case, the argument goes, because the results are so much better for them and society than allowing people to make mistakes and end up insolvent in their old age.
But principles are not justified solely on the utility of their outcomes, and can be violated for good intentions, and often are, just as thoroughly as for evil motives.
Liberty is a value for its own sake, and the freedom to manage one’s own life, for bountiful rewards or unfortunate deficits, is a right of each individual as a recognition that the primary ownership is of one’s own life, and its product.
A working man or woman may decide, and has the right to do so without interference from some pissy bureaucrat, that the proceeds from his monthly labor are needed for the betterment of his children, or that the money she earns is better spent on further education to improve her career prospects, and reject the idea that a significant amount should be taken away and given to a stranger.
Add to that the increasing likelihood that current workers will not receive any return on this enforced “investment”, as the Ponzi pyramid begins to totter over the next few decades, and the outrageous nature of the situation becomes even more blatant.
Current elderly enrollees must be grandfathered out, in recognition that they were promised this program would be there for them, and those near senior collecting age must be means tested to eliminate giving limited funds to already well-to-do people who really have no need of it anyway.
At a specific cut-off date, working people must be told in no uncertain terms that they’re on their own. Some will make good choices, and some will not.
It’s called life in the real world.
veryretired
I must (for once) disagree with you.
Even if todays young workers are explicitly told that they are on their own and they must make provision for their retirement, they still won’t. “Live for the moment” is the current motto for todays Generation Yers.
What will happen in 30 years time when the Yers retire? They won’t be allowed to starve. They will be bailed out. They know that, which is why they refuse to save.
The single biggest pension timebomb is the extent of the defined benefit schemes currently lavished on government workers (the private sector is rapidly moving toward the vastly cheaper defined contribution schemes).
This is the real damage from Gordon Brown’s massive extension of the state.
The next government will have to address this issue urgently or else taxes will have to rise above 50% of GDP.
But as I said, Pommy, this was not always the case. 150 years’ ago, when people were poor at a level that can scarcely be imagined today, people, of all ages, saved for their retirement, although of course many were too poor to do even that, and had to rely on charity. What existed then was a powerful ethic of thrift that has been destroyed, in part, by the Welfare State and a culture of instant gratification.
To rebuild that ethic is going to take a long time,
Of course humans are irrational
Indeed. Witness the Welfare State.
The problem with “soft paternalism” is it is trying to fix something without removing the problem.
It is like saying “we still need umbrellas indoors” when ignoring the leaking roof.
Jonathan, an excellent post. Agree on the destruction of thrift and the resulting insidious slide into paternalism that looks so oh so harmless and ‘rational’. Thanks for spelling it so clearly and forcefully.
I would disagree with the judgement that people are being irrational.
On the one hand, you can scrimp and save and work 40 hour weeks to pay your mortgage your whole life to get yourself money to support retirement and your kids an inheritance, and then when you get put into a care home you’ll have to pay it all out in fees.
Or you can have a good time, go on foreign holidays, spend as much as you are able, retire early, basically ‘have a life’, and then when you get to retirement age the means-tested benefits will supply your needs.
Which is the rational choice?
The problem is that means-testing creates a sort of poverty trap. Because saving now means you get less benefits later, you don’t actually gain anything by saving. Only when you can save enough to exceed the maximum benefit paid and start actually improving the treatment you get is there any rational motive, and that’s a lot more than most people earn.
Granted if everyone does that, the entire system is liable to collapse. But this is classic “tragedy of the commons” thinking – what is a rational choice for individuals is only irrational for the community as a whole. If government has a useful function, it is surely to provide the collective nous to stop tragedies of the commons. Sadly, the House of Commons is a tragedy itself.
The answer of course is to remove the means-testing. Everybody gets the same bare minimum for survival irrespective of how much they already have. That way, there’s a rational motive to save, because it will get you out of the Stephen-King-novel Eastern-Europe-style care home and into somewhere that you might want to live.
The fundamental problem is welfare Socialism. You won’t get people to pay their own way until they truly live in terror of poverty again. Bring back the workhouse!
Someone mentioned that the UK pension system is complicated. I worked at NICO (National Insurance Contributions Organisation) for a while and it’s a total nightmare. Shambolic, needlessly complicated and stunningly bureaucratic. I have never seen more paper in my life.
I was a temp, a foot soldier but I was curious to know exactly what the data I was entering was about so I asked around. I got the distinct impression management were pretty vague as to that as well. Part of the problem is that successive goverenments had meddled with the system meaning contributions at different times meant different things (I think tha’s a gross over-simplification). Nobody seemed to understand or even have an overview of what was going on. We were getting letters from insurance companies and sticking them into a computer in Warwickshire owned by Accenture. I have no idea why. These seemed to be private(?) or company(?) pensions and I am to this day confused as to why several thousand civil servants in Longbenton had to have a hand in it. Sir Humphrey would have been proud.
So, I suspect a simpler, cheaper to administer system would be much more appealing. That and if we could keep the likes of Grubby Gordon’s hands out of the till.
I’m not completely opposed to the idea of mandatory savings, so long as it does not require inter-generational theft and is truly a personal retirement mechanism that offers private market choices for investment. This may be the very culture changing event that regains the forward-thinking mindset necessary to remove requirements entirely in about 50-75 years time.
Pa Annoyed has hit on what should be a major controversy. The stakeholder pensions introduced in the UK are aimed at lower paid employees, but the amounts they can save are just enough to lift them out of means tested benefits. The choice in these cases is save all your life, and don’t enjoy spending your earnings and you will get a pension equal to your neighbour, who saved nothing and is therefore eligible for all the means tested benefits going.
The choice gets harder though if you don’t trust the government to honour its current pension promises.
Adriana, thanks!
One cannot, of course, ‘trust’ the government to honour its pension commitments 40 years hence. That’s like comparing the nation in 1945 to how it turned out in 1985, or vice versa. Nobody can predict what the economy or government will be like then. You are just as much at risk saving it for yourself. How many people had savings in the 1970s, when inflation hit 24%?
However, the judgement over what to do is relative, not absolute. When common land was over-grazed, people probably knew very well what they were doing. But if you voluntarily held back, and everybody else carried on, they would end up poor but you would end up even poorer. Everyone might well starve, but you’ll starve first, and there will be no mercy on you because of your foolish prudence. Individually, the only rational choice is to follow the herd, and take a little comfort in knowing that if hard times hit you at least won’t be alone.
If (not when) the system crashes, the poor will drag down the rich in the process. Can you imagine them saying one day “hard luck. We still have all this money but we need it ourselves. You’ll have to starve”? No, there will be a period where taxes go up and the remains of industry is crippled and the economy is driven to the brink before they admit defeat and surrender. Go ask the French about cutting back on welfare and state subsidy. Whether you lose your savings to the private care homes or the taxes to pay for the public ones, lose them you will. You had might as well spend it.
It is the inevitable logic of the ‘tragedy’. When you invest individually to benefit as a community, rational behaviour is to invest less than everyone else.
Eat, drink, and be merry, for tomorrow we go broke…
“History” (by which I suppose Freeman means historians – who have many different opinions of why various things happened) does not decide “what is rational” neither does “whoever has the most guns” (by which, I suppose, Freeman means whoever wins wars – which is not quite the same thing).
For example, if a good military commander and a mighy army declared that one plus one did not equal two it would still equal two (no matter how many people they killed), just as if they declared that A was not A (the law of idenity) A would still be A (regardless of how many people they killed).
Military and poltical history are the same subject as logic and military and poltical history (no matter how much blood is shed) does not determine what rationality is.
As for the supposedly irational (by which I suppose is meant stupid actions). I would not deny that individuals often do stupid things (although, as long as those stupid things do not involve violting the bodies or goods of other folk, they should be of no concern to government), but sometimes these stupid things are not quite so stupid as they appear.
Take saving for one’s old age.
People who save in company pension schemes have often found these pensions not arriving (the schemes go bust) and other people who see what has happened can think to themsleves “he might as well have spent the money when he had the chance and had some fun”.
Also pension funds in Britain have been raided by Chancellor Brown with special taxes – so people who thought they had saved enough for their old age are now finding that they did not.
Lastly (today) if one saves for one’s old age one is not eligible for many government benefits. So the man who enjoyed life may not be much worse off in old age than the man who did without and saved.
I fully accept that my anti tax and Welfare State points had already been made by prior writers (it was just the best example to hand).
As for saving for one’s old age among the poor in the past. A lot of this was via what the British called “Friendly Societies” (Americans called them “Fraternities” in the days when this word did not tend to mean a bunch of drunken college students).
The advantage of this form of saving over a commercial company was that if things went wrong all the fraternity members (and their children when they became adult) would be honour bound to help out “brothers” and their wives and children.
Shareholders of a commercial pension fund might not feel so honour bound to help those who depend on pensions provided by the pension fund if its investments went wrong.
“A bit of Gladstonian wisdom would not go amiss now.”
In so many ways…