Don't Trust Us With Social Security

Put the results of the two Hewitt studies together, and they spell death of Social Security reform -- at least any reform that would please my readers who feel the current program is paternalistic and coercive. To get around this propensity that nearly half of workers spend their retirement money when given a chance, any private-accounts program would have to ban withdrawals before retirement. To make workers use the power of compounding and the risk-reducing power of asset allocation, it's likely that any program of private accounts would be built around a few indices and life-cycle asset-allocation models.

Not much choice in that alternative, I'd say.

At Either End

It's not that a program of private accounts, or Social Security itself for that matter, needs to be paternalistic or coercive. We could design a retirement system that lets workers save and invest to the best of their abilities -- and achieve whatever success or failure the market brings. Some would do far better because they're good savers, smart investors or have better luck. Some would do worse, maybe much worse, because they don't save enough, are inept investors or have bad luck.

The current Social Security system is designed to take care of that last group. It is paternalistic and coercive in exchange for a guarantee that everyone receives some amount of income in old age that will keep them from abject poverty. That's why it's most accurate to think of Social Security not as an investment program but as retirement insurance.

Anyone who wants to design a system less paternalistic and coercive must honestly confront what we know about how workers now save and invest with their 401(k)s. The evidence says that a completely free and non-coercive system will produce many workers who will confront poverty in retirement.

There are two ways around this problem for those who want Social Security built on freedom and responsibility.

Trying to Teach

First, we could add a huge educational component to any plan for private accounts in the hope that educating investors would reduce the number of failed retirement savings accounts. Some companies take that route with their 401(k) plans, offering more investment education and hiring outside advisers. The jury is still out on the result.