Recently an idea has been bandied about in the mainstream press--Americans are too immature and too stupid to invest carefully for their old age--that ranks near the top of the dopiest ideas I've ever seen serious people propose seriously. The Boston Globe has a version that relies heavily on the statements of financial planners and financial advisors. The Los Angeles Times goes further, citing the poor investment decisions of a modern Who's Who in economics: Markowitz, Akerlof, Prescott, North, Kahneman, and Granger. (And also citing in support of the proposition distinguished economists Shiller, Laibson, and Stiglitz.)

I'm sorry, but I need to rant about this. Here are four reasons why this is an utterly dopey idea:

1. The most obvious reason is that there is no limit to this indictment. If people can't be trusted to manage their retirement money, there must be many other decisions they shouldn't be making. Buying houses, for one. Did you ever try to read--just read--all the paperwork that comes with buying a house? How can the average person possibly understand all the ramifications of that decision? From which it follows that people don't have enough information, and can't possibly forecast well enough, to select their own careers. And how about figuring out who to marry and whether to have children?  (Well, excuse me, Liberals believe that usually-incompetent-people-who-need-government-to-take-care-of-them magically become very competent when deciding whether to abort babies. My mistake.)

It may seem like a tired rhetorical device, but in this case it's really not: this idea denies a vital premise of both our economic and political systems.

2. The economists cited by the Times, with their nicely-compensated university positions, consulting, publications, Nobel Prize money and such, are, to be plain, rich. As some rich person--I can't find the cite--recently observed, "The main benefit of having money is that you don't have to worry about money." All that the poor investment decisions of certain university professors tell us is that they don't have to worry about money. It would be no different if we saw them buying $40 hamburgers or yachts: it would tell us absolutely nothing about what the average person does or should be doing.

3. If the average person can't plan his or her retirement, why would we think that 535 persons, known collectively as Congress, can do better? There's evidence that they can't. (More on that later this week.) (And if your reply is that without aid, there were many senior citizens who would have starved to death in the 30s and 40s: do yourself a favor and buy a calendar. It's 2005. The economic circumstances of the elderly are, for several reasons, d-i-f-f-e-r-e-n-t.)

4. The last, and by far the most important, reason is that the profound genius of markets is that most people, most of the time, don't need to be "smart". I don't know how to grow food, or make my own clothes, or build a computer, and maybe neither do you, but we have all those things, and much more, in great abundance, because markets are smart. That is why they are the most effective mechanism ever devised to make people richer. That is why we are prosperous beyond the wildest fantasies of people living only a century or two ago.

And in a lovely irony, the Times's own story makes just that point. Toward the end it notes, "TIAA-CREF and other giants like Fidelity Investments and the Vanguard Group have responded to evidence of people's faulty financial decision making — and the refusal of many to make any decisions at all — by rolling out accounts that make most decisions for investors." Similar to the way we hire farmers and tailors and real estate agents and lawyers and even economists to do jobs that we don't want to do, people who don't want to manage their investments carefully can hire people who will. 

It works pretty well most of the time. Unless, perhaps, you're a reporter for the Boston Globe or the Los Angeles Times; they tend to be too stupid.

Comments

[Josh Scandlen]

Excellent article. Never been to your blog before, referred from Polipundit. looking forward to visiting frequently. Josh

[Frank Borger]

I ran a spreadsheet figuring out what the 75% or so of the ss payments that go to retirement would have made if I had invested it in TIAA/CREF. (I'm lucky to have been able to invest in this program.)

Comaring the historical returns for TIAA itself, and TIAA/CREF results in the bond market and stock market, I could have purchased an annuity that would pay me 2 times, 2.5 times and 3 times the SOcial security return respectively.

MORE IMPORTANTLY, if I die today, my family would get retirement benefits worth diddly. Were that money invested, I would leave my family REAL investments (not government IOU's,) worth between $400K to $600K.

[Jacqueline]

Great post!

Personally I'm just going to stick my money in a Vanguard target retirement account and let them sort it out. :)

[Sean]

Another point about the Los Angeles Times article: the main professor stated (I think it was Markowitz) noted that he made a big mistake by NOT PUTTING ENOUGH MONEY INTO THE STOCK MARKET at a young age, and investing in too many conservative bonds. Hmm. This seems like a case for MORE personal financial control (and potential for higher risk), NOT less. Let's see - either the "ultimate" in low-risk, low-return, enforced investment (Social Security), OR leeway to invest throughot one's career - and especially at a young age - in higher-risk securities. Seems like Markowitz would advocate the latter plan, though his self-admitted "mistakes" seemed to have no relevance to the Times' writer besides an indication of fallibility on the part of an "investment great." (Gee...who ever heard of perfect market theory, anyway?)

[Sean]

Err...efficient market theory, that is.

[David Foster]

I think private accounts are probably a good idea, and I certainly don't think the American people are idiots...but I do worry that too many people lack the basic knowledge and conceptual framework needed to invest successfully. For example, Mobius Stripper (http://talldarkandmysterious.ca) reported a while back that most of her college math students are unable to grasp the concept of compound interest: one of them thought that $100 compounded for 5 years at 5% would turn into $2000, or something equally ridiculous.

It's true that there are index funds and such, but one needs a certain minimal knowledge level to even be able to choose from the alternatives rationally.

[Tom Hanna]

Frank Borger's comment is especially interesting when you consider that TIAA/CREF has a track record that many financial advisors (especially CFPs) literally laugh at. So, a laughable private sector track record can take 3/4 of the investment and still return 2-3 times as much as the government. Think what the good ones can do.

[Bostonian]

Gosh, David's right. Now I'm worried about all those people making poor choices in buying houses, choosing schools, and choosing careers that can earn money. People screw up that stuff all the time too!

[thc]

Nice post. I'm a CFP and earn my living helping people make intelligent planning and investment management decisions. Investing is serious and complex business but it should be put in the hands of the individual to do on their own or with the professional of their choice. The notion that government knows best how to invest *your* money is absolutely absurd.

[MarkSC]

It's not about money; it's about control. If you have control of your money then the government doesn't have control of you.

[Jack Olson]

Some employers automatically enroll new employees in the company
401(k) plan. The new employee can opt out, but many aren't aware
that they've even been enrolled. Their rationale for this is that
they know better than the employee what he should do with his money.
We all know what's wrong with nanny government: it's tyranny. So is
an employer who tells you how to use your money. What is the
difference, after all, between an employer deciding for you that
you need a 401(k) account and secretly signing you up, or your bank
deciding that you need an IRA and taking money out of your checking
account to fund it? The only difference is whether they do the
unauthorized transaction before or after you cash your paycheck.

[rmark]

Framks spreadsheet calculations are true only if he was one of the few to opt out of SS and invest on his own. It everyone had done it, prices would have risen, resulting in a lower return than historically occured.