Social Security, Healthcare, and the Fallacy of Consumer ‘Choice’

And note, outside of voting, no one ever uses the phrase ‘citizen choice’, do they? But I digress.

I recently had to go the hospital for a routine exam, which always involves lots of sitting in waiting rooms. While my vision might not be quite what it once was, the hearing still works just fine. And I am very frightened. The amount of healthcare-related ignorance is truly terrifying. Mind you, most of these people are not stupid: they certainly seemed capable of holding down jobs, in some cases, very lucrative jobs. But they shouldn’t be making healthcare decisions without a lot of advice and guidance.

The same problem applies to long term investing, as Joe Nocera explains (boldface mine):

More accurately, I can’t retire. My 401(k) plan, which was supposed to take care of my retirement, is in tatters.

Like millions of other aging baby boomers, I first began putting money into a tax-deferred retirement account a few years after they were legislated into existence in the late 1970s. The great bull market, which began in 1982, was just gearing up. As a young journalist, I couldn’t afford to invest a lot of money, but my account grew as the market rose, and the bull market gave me an inflated sense of my investing skills.

I became such an enthusiast of the new investing culture that I wrote my first book, in the mid-1990s, about what I called “the democratization of money.” It was only right, I argued, that the little guy have the same access to the markets as the wealthy. In the book, I didn’t make much of the decline of pensions. After all, we were in the middle of the tech bubble by then. What fun!

The bull market ended with the bursting of that bubble in 2000. My tech-laden portfolio was cut in half. A half-dozen years later, I got divorced, cutting my 401(k) in half again. A few years after that, I bought a house that needed some costly renovations. Since my retirement account was now hopelessly inadequate for actual retirement, I reasoned that I might as well get some use out of the money while I could. So I threw another chunk of my 401(k) at the renovation. That’s where I stand today.

When I related my tale recently to Teresa Ghilarducci, a behavioral economist at The New School who studies retirement and investor behavior, she let out the kind of sigh that made it clear that she had heard it all before. The sad truth, she told me, is that I’m the rule, not the exception. “People have income shock, like divorce or loss of a job or a health crisis,” and those crises tend to drain retirement accounts, she said.

But even putting income shocks aside, she said, most human beings lack the skill and emotional wherewithal to be good investors. Linking investing and retirement has turned out to be a recipe for disaster.

“People tend to be overconfident about their own abilities,” said Ghilarducci. “They tend to focus on the short term rather than thinking about long-term consequences. And they tend to think that whatever the current trend is will always be the trend. That is why people buy high and sell low.” Financial advisers — at least the good ones — are forever telling their clients to be disciplined, to create a diversified portfolio and to avoid trying to time the market. Sound as that advice is, it’s just not how most humans behave.

Most people would have been better off if we had let them contribute the money they put into their 401(k) plans into Social Security: just treat it as an additional tax and adjust their benefits accordingly. If you got in the 1980s, the downturn hasn’t really hurt you (yes, you lost money, but you made a ton in the late 80s and 90s bubbles). But baby boomers have been clobbered, and they’ll never get the money back. They would have been better off with either pensions, as Nocera notes, or higher Social Security payouts.

And that’s before you get to the research showing that some financial advisers steer clients toward investments that yield higher fees for the adviser, as opposed to greater returns for the investor. The last few years have demonstrated that, outside of index funds, there is a house that always wins, and you are not the house. Of course, there’s also the obvious: everyone can’t beat the market. Someone has to lose.

(An aside: The 401(k) plans were never about ‘choice’ for most people anyway. First, they were a way to reward wealthy and rich people with yet another tax break for doing something they would have done anyway–a common theme in the Carter/Reagan era. Second, they were viewed as a way to pump money into the stock market, which had collapsed.)

The notion of choice is even more idiotic when you consider healthcare, since you have no way of knowing how or when you will be sick, so believing that anyone could possibly choose the ‘best’ plan is idiotic:

What led me to blunder into the obvious was having to decide which health insurance plan to choose at my new job. I had a total of seven different health insurance plans to choose from, three of which were HMOs. The HMOs were the most interesting: the most expensive was $173/month (for an individual), and the least was $118/month. As far as I could tell based on the benefits package, the $118/month was the ‘you are legally required in Massachusetts to have health insurance, but if anything happens other than an annual checkup, you’re hosed’ plan. But I could be wrong: maybe someone paying $173 per month is just wasting his or her money. Or maybe we’re both screwed if something bad happens.

The problem is that I have no way to evaluate how good any of these plan are at keeping me healthy… It would be nice to see these plans broken down by healthcare outcomes (and death too…) as well as patient satisfaction (granted, these data would have to be subdivided–a twenty-five year old woman isn’t the same as a sixty-five man).

This is one more reason why consumer choice healthcare is a bad idea: we’re essentially gambling with our health. I use the word gambling because none of us have any way to evaluate if the insurance we have picked will provide the healthcare we need if something disastrous (or even mildly annoying) strikes. I have no idea if something bad happens (and there are many kinds of ‘somethings bad’) whether my plan will provide the healthcare I need. Would I have access to the specialists I might require? Which treatments would be covered, and for how long?

Realistically, I can’t determine that. That’s not a choice, it’s Russian Roulette.

When someone mentions money and ‘choice’ in the same sentence, check your wallet. Then run as fast as you can in the opposite direction….

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2 Responses to Social Security, Healthcare, and the Fallacy of Consumer ‘Choice’

  1. dr2chase says:

    Sounds Usual, Customary, and Reasonable to me.

  2. joemac53 says:

    I did not choose teaching for the pay or the pension. At the ripe old age of 24 I was looking for a teaching job because I enjoyed working with kids. Now I am retired from teaching and still working. This will go on until my legs give out. I used to have a Cadillac health plan because it was the only one available in my town. So much for choice. I did not go to the doctor for the first 26 years of having this health plan, as routine physicals were not covered by the plan (go figure). I inherited some stocks just as the tech bubble burst and watched their value get cut in half in a couple of months. I have never touched this stock and today have no idea what it is worth. I reinvest most of the dividends. My kids can blow this money on my grandchildren’s education or some other frivolous trifle. I distrust all banks and money managers.
    When I got cancer I did not shop around for surgeons or oncologists: if I had taken the time I probably would be long gone by now.
    I spent my working life trying to do the best I could for my students. I used to believe that other “experts” would do the same for me.
    If we believe that the “private sector” will be good to us, we are wrong. If we believe the “gummint” will be good to us, we are wrong. The social contract has been broken and I’m pissed about it. I would prefer anarchy.

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