Policy Nudges and Fudges

One thing the technobrat set loves is the concept of ‘nudges’, which are seemingly small changes in policy that cause behavioral changes leading to Utopia better policy outcomes. A few years ago, when ‘nudging’ people to save more for retirement was all the rage, I noted a slight problem with that clever plan:

I don’t see how many middle class and poor families are going to be able to save–that is, lock up cash in long-term investments. If somehow they are currently managing to do this, there’s no way in hell they can afford to save more on these sorts of incomes.

They don’t have the money.

I’ve also noted in the past that the favored retirement vehicle, the 401(k) is little more than a scam for most people.

Frank Pasquale in a recent article also notes the scam of the 401(k):

In finance, the problems with nudging reveal it may even have a dark side. Nudgers are quick to push workers toward retirement savings, but sometimes are not doing enough to warn them about possible risks. The think tank Dēmos estimates that, over a lifetime, retirement-account fees “can cost a median-income two-earner family nearly $155,000.” John Bogle, an investor, has noted that a 2 percent fee applied over a 50-year investing lifetime would erode 63 percent of the value even of an account with healthy returns. As Bogle puts it, “the tyranny of compounding costs” is overwhelming, but that’s what some workers are nudged toward by their employers.

This exposes the problem with nudging–it’s really a responsibility shift to those who have the least ability to affect outcomes (boldface mine):

So why are policymakers so enamored of it? Because the nudge is really a fudge—a way of avoiding the thornier issues at stake in retirement security. The most worrisome unexpected costs of old age, including medicine and personal care, should be addressed by politicians via programs such as Medicare and Medicaid. But by focusing on individuals’ decisions to save up for retirement, they can shift responsibility.

This focus on the individual, rather than the wider social context, is not surprising given that nudging comes out of microeconomics and psychology, two disciplines that tend to break the world into dyadic transactions between isolated individuals and firms. A sociological or political perspective, on the other hand, points to the real roots of retirement insecurity: a great shifting of risk from corporations to individuals. Workers can be urged to take all manner of “personal responsibility” for saving—but if their wages are stagnant while other costs are rising, it is hard to imagine that strategy really working

By reducing the great political issues of health care and finance to quotidian struggles over whether to save or spend, eat or abstain, behavioral economists have generated policy recommendations easily related to voters and promoted by politicians. But their individualistic approach to what are ultimately social problems may end up exacerbating the very conditions they claim to ameliorate.

To me, the key ‘advantage’ of nudges is they allow policy makers to avoid making hard decisions in public. If you can change behavior simply by switching opt-in/opt-out defaults (e.g., you have to choose to not put money in a retirement account), you don’t have to hold hearings about why so many people aren’t saving for retirement.

Because that could lead to some very uncomfortable discussions.

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1 Response to Policy Nudges and Fudges

  1. The big group that does research on retirement defaults (Madrian, choi, etc) came out with a paper making this same point a few years back, called “the limits to defaults.”

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