Sometimes, they really do know what's best for you

August 28, 2006|By Steve Chapman

CHICAGO -- Do you know you need to save more for retirement, but you just can't make yourself do it? Relax. Soon, you may not have to make yourself do anything - you'll save more in spite of yourself. It's a new approach to financing retirement, and it's as easy as falling in love.

The new pension bill passed by Congress makes a small but significant change in the administration of the employer-provided, tax-deferred accounts known as 401(k)s. Under this bill, employers - at their own discretion - will be allowed to enroll their workers. In the past, diverting a share of your paycheck to one of these funds required you to take action - by signing up for it and deciding how much to contribute. In the future, you may find that unless you actively opt out, you'll be in.

This measure grew from two sources. The first is the perceived need to encourage saving, which the bill is bound to do: Experience indicates that enrollment by employers should increase participation from about 66 percent of employees to about 92 percent.

The second is a new approach to public policy known as libertarian paternalism, which sounds as impossible as fried ice cream. Government programs often pit libertarians, who think people should be free to live their own lives, against paternalists, who believe they know best. This new philosophy, however, tries to marry the two traditions. It argues that we should staunchly uphold the right of people to choose badly - while making it easier for them to choose wisely.

The pension bill tries to maximize freedom while fostering prudence. Many people fail to do things that are in their own interest, not because they don't want to but because they never get around to it. So libertarian paternalists recommend a change in the "default rule," which determines what happens if you fail to act. In this case, you end up in a saving mode. Inertia becomes an ally.

That's the paternalist part, reflecting a judgment by your employer and your government that you are better off providing for retirement - and that once you start, you'll be glad you did. The libertarian part, however, is just as important: Anytime you want out, all you have to do is ask.

But you don't have to be a libertarian paternalist to welcome the pension-law change: Classic libertarians (like me) see it as a victory for freedom of contract, allowing employer and employees to seek a mutual optimum. If workers like being nudged to delay gratification, companies offering automatic enrollment will benefit.

Libertarian paternalism has insights that deserve to be incorporated into public-policy debates. But it also carries risks. In the first place, it encourages the notion that society can easily judge the wisdom of individual choices. That's not always true, because individuals have far more information about their own interests - and how to pursue them - than even the smartest experts can acquire. In the second place, once the government starts encouraging people to behave a certain way, it will be tempted to force them.

The test of this school of thought will be whether, in the long run, its disciples place as much importance on preserving liberty as on promoting welfare. If they are truly resolved to abandon coercion for persuasion, they may be creating a paternalism fit for a free people.

Steve Chapman is a columnist for the Chicago Tribune. His column appears in The Sun on Mondays and Wednesdays. His e-mail is

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