Veritas propter investigationem [Truth through research]
TitleThe Separation of Intelligence and control - The Retirement Savings Crisis and the Limits of Soft Paternalism (2015)
AuthorsJacob Hale Russell
InstitutionWilliam and Mary Business Law Review
TopicsBehavioural economics
 Auto-enrolment, opt-out
 Default investment options
CountryUnited States
Date Published2015
Date posted on PR09 Jun 2015
Russell, HJ, (2015). The Separation of Intelligence and control - The Retirement Savings Crisis and the Limits of Soft Paternalism (2015) William and Mary Business Law Review,

PensionReforms’ summary and comments

The principles of ‘behavioural economics’ are founded on a notion that we know what’s in the best interests of citizens so why not trip or nudge them into doing that?  Having been sent in the ‘right’ direction, they can always opt out.


The report looks at retirement saving issues in the United States and suggests that “too much is being asked” of what the report calls ‘soft’ or ‘libertarian’ paternalism.


“In particular, this Article focuses on investment allocation decisions in retirement portfolios, and suggests we should be skeptical of the ability of soft paternalism to improve those decisions.”


The report suggests that investment allocation decisions are  “rife with conflicts of interest” and so “soft-touch strategies fare poorly”.


Of course, the whole retirement savings framework rests on complex tax incentives that are themselves a form of ‘soft paternalism’.  In that environment, the report suggests that we should instead “…consider direct regulation of investment options available to retirement accounts.”


In the US, as elsewhere, the role of centralised Defined Benefit schemes has reduced in favour of Defined Contribution, individual saving schemes (such as 401(k)s and IRAs).


“…the responsibility for making complicated financial choices was redistributed to the individual saver - who typically lacks the knowledge and sophistication to make such choices.  The result has been that many savers make costly mistakes in investing their portfolios.”


Watching those ‘mistakes’, policymakers have developed a number of ‘remedies’ including some from the soft paternalism stable.


“This Article argues that nudges have failed and will continue to fail in improving the allocation of retirement portfolios, because of problems that are common in many nudge programs.”


There seem to be three main difficulties – conflicts of interest; lack of connectedness to the ‘problem’ and a conflict between the supposed autonomy of what is argued as the member’s ‘best interests’ alongside the government’s direct intervention through tax.


“In leaning on soft regulatory solutions, we too often forget the lessons of behavioral economics itself.  In the retirement allocation system in particular, we think too little about the problems posed by the unique set of misaligned incentives in mutual funds and retirement services.  In other words, readers can view this Article as a bit of a “nudge” itself - not a blanket decree that nudges should always be avoided, but an attempt to counter-bias those scholars who have developed overconfidence in nudge-based strategies.”


Direct regulation may be preferable – for example, requiring “…funds to meet certain requirements with respect to fees and investment content in exchange for the chance to compete in the lucrative, taxpayer-subsidized retirement savings game.”…


“The new MyRA “starter” accounts, announced in this year’s State of the Union address, may suggest a possible path towards a more paternalistic allocation scheme. The accounts are available to anyone, whether or not they have a workplace savings plan, and are run for free by the government.  There is only one investment option: a government-run plan that pays the same variable interest rate as the Government Securities Investment Fund available to federal workers; participants face no risk of losing money.”


The report notes though that having deliberately got savers used to a single investment option, they may be confused by the choices subsequently available in 401(k) schemes.


‘Nudge’ supporters claim that nudges are “usually the best response ... in the face of behavioral market failures,” and  can increase welfare “without compromising the legitimate claims of freedom of choice.”


The report thinks these claims should be treated with scepticism.


“Choice architecture is inevitable.  Choices will always be contingent on framing and presentation, and behavioral economics has drawn valuable attention to that problem.  But this observation does not let us escape from making fundamental policy choices - if anything, it only makes the need to make them more acute, since we have more reason to mistrust choices made without active intervention.”


“Use of nudges is too often an easy way out of a difficult policy problem, and, not surprisingly, easy solutions to thorny policy dilemmas are usually illusory.”


PensionReforms agrees but would go further.  It is true that tax breaks are a form of state-sponsored paternalism that ‘infects’ the nudgers’ case but a saver’s tax break is someone else’s tax cost and ‘soft paternalism’ needs to look at the whole question, not just bits of it (the saving programme itself).


Given the generous tax breaks for 401(k) schemes and also the employer’s subsidy that commonly follows the employee’s own contributions, it is relatively easy to see little long-term financial disadvantage to saving in a 401(k).  However, what if tax subsidies disappeared as PensionReforms thinks should happen?  What happens if we have another Global Financial crisis?


In summary, PensionReforms asks what business is it of policymakers whether individuals are (or are not) saving ‘enough’ for retirement?


It does seem illogical for an employee to turn down a tax break or an employer subsidy.  However, it does not follow that, by failing to join (or failing to maximise the subsidy or opting-out) the employee is under-saving for retirement which is, presumably, the ‘problem’ that needs ‘fixing’.  Proof of that can be obtained only following a close examination of the employee’s total household position, particularly where there is more than one earner.  Then we need to understand the household’s aspirations.  That someone knows ‘better’ than savers what to do with a saver’s income is, for PensionReforms, a stretch too far.  (File size 341 KB; 49 pp) 726