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Are We Really Too Stupid to Care for Ourselves?

The take-away lesson of this report in yesterday’s New York Times is supposed to be that too many Americans are too ignorant of the principles of personal finance to be given greater personal responsibility for their own retirements.

These clips from the report give a good sense of its thrust and message:

With Washington considering whether to strengthen Social Security by giving Americans more responsibility for their own retirements, a survey released yesterday suggested that the typical American does not know enough about economics to prosper in such a system.

The survey, conducted by Harris Interactive, found, for example, that about half of American adults did not know that if they kept their money at home, in cash, they were at greater risk of losing ground to inflation than if they invested it elsewhere.

"Given recent signs that inflation might be increasing, this is quite a frightening finding," said Alan B. Krueger, an economics professor at Princeton University who served as chief economist for the National Council on Economic Education, a business group that commissioned the survey…..

Mr. Krueger, who contributes a column for the business section of The New York Times, said these findings were disturbing, given the big increase in the number of households that hold stocks and mutual funds.

"Many Americans are potentially open to scams because they don’t understand the purpose of the financial markets," he said yesterday.

Other analysts said they thought that the findings added to a growing body of evidence that the typical American is poorly equipped to take advantage of what proponents call the ownership society: a future in which individuals are free to invest their own retirement money, rather than having to accept the returns offered by the Social Security program or a group retirement program at work, like a pension plan.

Let’s not question the finding that many Americans today lack the knowledge to invest wisely for their retirements.  Indeed, let’s agree with Alan Krueger that Americans’ ignorance of basic finance and economics make them “potentially open to scams.”

Do these findings – does Americans’ shocking ignorance of finance and economics – really weaken the case for turning over to each of us more responsibility for our retirements?  I don’t think so.

First, the fact that Uncle Sam has for so long assumed primary responsibility for providing for Americans’ retirement goes a long way toward explaining much of Americans’ ignorance about investing for retirement.  Americans simply have less incentive to learn about such matters than we would have if each of us were responsible for our retirement.

A person kept from ever swimming in the deepest part of the pool ought not be judged to be an inherently poor swimmer because he cannot today do more than dog paddle in shallow water.

More importantly, the alternative to greater personal responsibility is government control – that is, strangers on the Potomac making and enforcing rules for 300 million people, each with unique histories, needs, circumstances, and hopes – not to mention risk-tolerances.  How do we know that these strangers in Washington are sufficiently competent to formulate and enforce sound rules for taxing funds from each American and then ‘investing’ these sums in ways that prove wise?

The presumed answer is that ours’ is a democracy.  The wisdom of The People ensures that our government is responsive to our needs – that it generally does what’s right and wise – that it looks after us and protects us.

Pardon the predictable question, but if Americans generally are so utterly uninformed about basic principles of personal finance and economics – if we’re such an ignorant lot – how can we be trusted to elect wise leaders?  What reason is there to trust that the outcomes of elections and the policies chosen on Capitol Hill are appropriate and wise? If we’re such easy marks for scam artists, isn’t much of what government does likely to be a scam?

The ostensible lesson of this NYT report, then, is that in our individual, private capacities we are benighted and irresponsible fools but that as voters and political actors we’re informed and wise enough to choose good leaders and to monitor them so that they regulate us in ways that promote our well-being.

This is backward.

When someone is given responsibility for his own well-being, he is more likely to take the initiative to promote his well-being – for if he doesn’t, he suffers the consequences (and, of course, if he does, he reaps the rewards).  But if responsibility for my well-being is shared among hundreds of millions of voters – and then further delegated to hundreds of politicians and bureaucrats who do not know me – what reason have I to trust that these strangers will use my resources in ways that are better than I would use these resources?