It’s not a nudge when it comes from Washington.
Feb 17, 2014, Vol. 19, No. 22 • By ABBY W. SCHACHTER
Cass Sunstein had to be the happiest academic in America following President Obama’s recent State of the Union address. After all, in just four short years he got his analysis of how people need help making good choices—a nudge in the right direction he likes to call it—from manuscript to a brand new retirement savings vehicle. Of course, Sunstein took a break from academia to become Obama’s first regulations czar, so the president was already a fan of the Harvard Law professor. But still, having an idea that you and coauthor Richard Thaler describe in the 2009 book Nudge: Improving Decisions about Health, Wealth, and Happiness come out of the president’s mouth in the State of the Union is as big as it gets for any professional.
Too bad that’s about the most impressive thing about the new MyRAs.
“Let’s do more to help Americans save for retirement,” the president said. “Today, most workers don’t have a pension. A Social Security check often isn’t enough on its own. And while the stock market has doubled over the last five years, that doesn’t help folks who don’t have 401(k) s.” (This formulation comes almost wholesale from Chapter 6 of Nudge.)
The answer, according to Obama, is offering a savings vehicle called a MyRA, as in my retirement account, to individuals who earn up to $129,000 a year and couples who earn up to $191,000 a year. The program, like the name, is similar to a Roth IRA, which is funded with after-tax contributions and is tax-free when withdrawn at retirement. A MyRA is invested in Treasury bonds and backed by the federal government against losses. Initial contributions can be as low as $25 and additional contributions can be as little as $5. These starter retirement accounts can grow to a maximum balance of $15,000 before the money has to be rolled over into a private-sector Roth IRA. The account can move with the individual if he changes jobs since it is a private account belonging to the employee. The Treasury Department says MyRAs are “designed to help savers start on a path to long-term saving and serve as a stepping stone to the broader array of retirement products available in today’s marketplace.”
As Lydia DePillis wrote in the Washington Post, the MyRA is “basically the embodiment of . . . Sunstein’s ‘nudge’ philosophy, which pushes people by default into the choices that make most sense for them.” The technical term is “choice architecture,” which means that decisions are designed and limited in order to have individuals do something that is deemed ultimately good for them, even if they don’t realize it. In this case, as Sunstein and Obama both argue, saving for retirement is a good thing that more people should do but don’t. So here comes a government vehicle to get those who aren’t saving to start. And Sunstein believes that government should make its push to save for retirement even more aggressive by forcing workers to opt out rather than ask to set up an account and by having deposits made by automatic payroll deduction.
Richard Williams, the director of policy research at George Mason University’s Mercatus Center, disagrees that government “nudges” are in the individual’s best interest. Take buying a car, for example. As Williams explains,
The possibility that individuals might prioritize something other than fuel efficiency is of no importance to the government because, as Williams concludes, “nudges are about achieving government goals, not personal goals.”
MyRAs fall into the same category when you understand that government goals are served when someone buys Treasury bonds, now that the Chinese aren’t anymore. As John Girouard wrote at Forbes, “the federal government is stuck with a lot of unpopular bonds, and one sure-fire way to get rid of them is to sell them to the American public as a retirement savings vehicle. It’s a wolf in sheep’s clothing.”
Perhaps the Obama administration is hoping that the MyRA will serve dual purposes, though. As Sunstein proposed, people will get into the habit of saving for retirement, which they should be doing anyway, and the government will get someone to buy its debt. But this is wrong on both counts.
Sunstein is wrong that government is the correct vehicle to get individuals to change their behavior, even if one supports the behavior being encouraged. As Tom Bartlett just wrote in the Chronicle of Higher Education, “the federal government has spent nearly a billion dollars to help poor couples stay together—with almost nothing to show for it.” Indeed, the Family Expectations program is such a dismal failure that Bartlett wonders why it isn’t being shut down. And remember, too, that Family Expectations is a relatively inexpensive experiment in behavior modification compared with various other federal programs.
Meanwhile, Sunstein and Obama are presupposing that saving for retirement is the most important goal for those who aren’t already doing so. It isn’t necessarily, and the reason is that too many individuals are facing a bigger problem than having enough money when they stop working. Before saving for retirement you ought to be putting something away for what used to be known quaintly as a rainy day. According to a study just released by the Corporation for Enterprise Development, “the percentage of households in the U.S. who lack the savings needed to weather a financial storm like a job loss or medical emergency is holding tight at 44 percent, suggesting that almost half of Americans are on the brink of financial calamity.”
That “almost half” of Americans are exactly the people Obama’s MyRA accounts are targeting. And if those workers are ruined financially today, what does it matter if they haven’t saved enough for tomorrow?
Abby W. Schachter, a senior fellow at the Independent Women’s Forum, blogs about the intersection of government policy and parenting at captainmommy.com.
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