Bryan Caplan  

Planning for the Unpleasant Future: Private vs. Public

Brief Notes from Kansas City... My Review of Bruce Bartlett...
Thinking about being old and sick is no fun.  It's tempting to simply refuse to ponder the unpleasant future.  But notice: Whether people give into this temptation depends heavily on whether they're thinking personally or politically.

Personally, almost everyone at least contemplates being old.  And most people make some plans for their retirement.  Many even write wills.

Politically, however, only a handful of eggheads think about the fact that our society is rapidly aging.  Common sense tells us to get Social Security and Medicare in financial order while there's still time.  But voters don't want to hear it - and politicians are careful not to insist.

I see rational irrationality at work.  People face a trade-off between forgetting harsh realities and effectively mitigating those harsh realities.  When all the costs are private, people engage in a little denial, but they're usually realistic enough comfortably retire.  When the psychological costs are private and the harsh realities are public, however, people embrace denial on a massive scale.  They vote for high benefits and low taxes, and freak out at the prospect of higher retirement ages, means testing, bigger co-payments, technocratic cost control, or - God forbid - privatization.  The result will be a train wreck by popular demand.

The silver lining: If my analysis is right, a lot of people will increase their retirement savings to shelter themselves for the train wreck they're voting for.

COMMENTS (8 to date)
david writes:

Trivia: consider a state which does force its people to save en masse, of which there are a few. Singapore is one. Prior to the GFC there was popular pressure to liberalize the degree to which savings were managed (to permit participation in assorted schemes as the local financial industry was liberalizing), which the regime grudgingly accepted. Restrictions were of course hastily re-imposed during the GFC, and the regime is raising the age of 'retirement' (the age at which account funds can be withdrawn) at enormous popular opposition.

Observe that, this being Singapore, these are individual accounts, not a PAYG pension scheme. Observe further that the state account has, historically, been able to 'beat the market' ever so slightly (possibly due to size - the GIC is very large).

Question: is the hypothesis of bias-driven rational irrationality so finely-tuned that it can empower opposition to publicly-enforced individual savings so that people will attempt private savings? Really?

Bryan Willman writes:

In addition to "rational irrationality" there's the issue of "we have to live through the short term to get to the long term."

Stipulate that broadly higher taxes and broadly lower benefits will be required. But suppose that those measures stall the recovery, or even lead to a depression? Then it doesn't matter that they are the right thing for the long term - we have to live through the short term first and always.

And perhaps that's just reality - that given the long path that led to the current demographic issue, there is no escape that does not involve great pain. And that over the very long term (e.g. hundreds of years) the only stable governments will be those that make very few promises which they can always keep.

Brandon Berg writes:

Common sense says to get to work on a cure for aging. Why mitigate the problem when you can solve it?

Becky Hargrove writes:

From what I've already seen in this last decade, the biggest thing that works against us as we unwillingly 'creep' towards old age is the way we isolate ourselves as we get there. When old friends die off and work is a distant memory, people either tend to hole up in their houses (relying primarily on children) or end up in group homes where ability to make decisions disappears. I actually envy earlier societies in that the young and the old, and one's neighbors were still around when people aged. We need to get back to some new semblance of that, because isolated old age is no fun.

blink writes:

I don't see why you need to invoke rational irrationality here. This situation seems easy enough to explain by competing special interests and inter-generational conflict of interest. Do you have evidence that the parsimonious explanation is wrong?

Jim Glass writes:

Thinking about being old and sick is no fun. It's tempting to simply refuse to ponder the unpleasant future...

For instance: It is very well documented that people *massively underestimate* the risk that they will ever need long-term nursing home care due to catastrophic accident/illness. The need doesn't have to arise in old age -- accidents and disease do happen to the young.

People are well aware of those horrible *true* stories about the cost of long-term care wiping out family finances and lifetimes of savings -- but overwhelmingly think that will happen to someone else.

This is clearly seen in that even people who are scrupulous about drafting wills, securing life insurance, having an estate plan, etc. (which is far too few people to begin with) hugely neglect long-term care insurance.

And, of course, the politicians act "rationally irrational" in response to this, by correspondingly mal-forming the national health care system, Medicare in particular.

I.e.: Medicare covers routine medical expenses that everybody knows they will incur -- regular doctor visits, tests, drugs, etc -- from the first dollar ... but doesn't cover long-term care needs.

This is like an auto insurance system that pays for all your gasoline, oil changes, new tires, detailing and other routine operating expenses -- but *doesn't* cover you if you smash your car head-on and go flying through the windshield.

By any measure of economic rationality this is insane. Paying first-dollar costs for routine, fully expected expenses greatly increases demand for them and thus the system's total cost -- while leaving truly catastrophic risks that should be covered by risk pooling ignored, and still out there to destroy people and families. If you wanted a *worse* expense-to-benefit ratio for the entire system, how would you start other than like this?

But by political logic this design is completely rational. The politicians are getting votes by covering the expenses that voters think they will incur, and not covering expenses voters think they won't incur.

In fact, what other kind of system is possible given the voters' beliefs? Any politician who tried to reverse the formula -- cutting reimbursement for routine expenses to pay for new long-term care coverage -- would be "quickly removed from the political gene pool".

Should anyone doubt this, just remember how Dan Rostenkowski was literally attacked in the street by an AARP mob when Congress enacted a "catastrophic coverage" long-term care benefit accompanied by a little premium that seniors were to pay for it - and how quickly after that attack Congress repealed it! Congress sure remembers.

Silas Barta writes:

That's pretty much what I'm doing, minus the part about personally voting for the stupid, screw-the-future policies.

Jerry G. writes:

Touch of gray in the silver lining: In order to fill the inevitable gap between (meager) public retirement benefits and individual savings, the government will tax or inflate away the extra savings of those more prudent people who recognized the system's shortcomings. See housing bubble, foreclosure mess.

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