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 will be allowed to enroll their workers at their own discretion. 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 automatic enrollment 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 individuals 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, the most prominent being law professor Cass Sunstein and economist Richard Thaler of the University of Chicago, 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. If your family history suggests you’ll die before you reach age 65, you may decide a pension is not a priority, and you will be free to act on that conclusion.
The thinking behind the automatic-enrollment bill is that in many instances, particularly where they have little experience, people don’t have strong preferences. What they choose depends greatly on how choices are presented. Patients are much more likely to agree to a risky operation, for instance, if they are told it has a 90 percent chance of success than if they hear it has a 10 percent chance of failure.
But you don’t have to be a libertarian paternalist to welcome the pension-law change: Classic libertarians (like myself) see it as a victory for freedom of contract, allowing employers 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 government starts encouraging people to behave a certain way, it will be tempted to force them. Years ago, we established a policy that you had to buy seatbelts with your car, but you didn’t have to use them. Today, we give tickets to people who don’t buckle up.
Once you decide a policy is best for everyone, it’s a short step to forcing it on everyone. Can libertarian paternalism inoculate liberals against old-fashioned nannyism? Or will 401(k) plans become mandatory?
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.