Bush's plan to turn America into an ownership society

THE NEW YORKER

THE FINANCIAL PAGE
THE RISK SOCIETY
by James Surowiecki
Issue of 2004-11-15
Posted 2004-11-08

George W. Bush was reëlected last Tuesday not because of the job he did running the economy in his first term but in spite of it. (Voters for whom the economy was the most important issue voted for Kerry by a four-to-one margin.) Bush doesn't get to coast for the next four years, though; he's facing a host of economic problems, particularly the mounting cost of health care and the looming crisis in funding for Social Security and Medicare. Bush, of course, has a master plan: he intends to turn America into what he calls an ownership society.

That sounds unobjectionable?-who's against ownership? But what the President has in mind is nothing less than a radical overhaul of America's entire system of social insurance. In place of unwieldy government programs run by busybody bureaucrats, Bush wants Americans to have more independence and more choices regarding their health care, their savings, and their retirement. Social Security would be partially privatized, with people allowed to put aside money in individual accounts. Private health-insurance plans would compete with Medicare. Tax-free retirement accounts would be expanded. And health savings accounts would let people save money for health-care expenses tax-free, as long as they agreed to sign up for plans with high deductibles. The result, Bush claimed earlier this year, would be "greater opportunity, more freedom, and more control over your own life." And with freedom, presumably, will come greater responsibility; people will be more careful as users of health care, more diligent as savers and investors.

Fair enough. All things being equal, letting people make decisions for themselves will produce smarter outcomes, collectively, than relying on government planners. It may also promote attentiveness. As the economist Lawrence Summers has said, "No one in the history of the world has ever washed a rented car."

No one in the history of the world has ever had a free lunch, either. The ownership society promises freedom, but at the price of a huge shift in risk, away from government and society and onto individual citizens. Social Security, Medicare, insurance?-these are basically collective risk-sharing mechanisms. Rather than let each person run the risk of ending up destitute or sick, these programs pool the risk. Because the risk is shared, it can be managed, and people can be guaranteed a minimally acceptable outcome. In Bush's brave new world, that guarantee will be eliminated.

This is what has happened as 401(k) plans have replaced traditional pension plans. With a 401(k), you have a lot more control over your financial life. You, not a pension-fund manager, decide how much to save and what to invest in. For some people, this shift has been a great boon, and it has made it easier for workers to change jobs without relinquishing retirement money. But for others (like those who staked their retirements on Enron and Pets.com) it has been a disaster. With a traditional pension, the company (or the government, in cases where the company fails) bears the burden of providing for the retirement of its employees. With a 401(k), the burden falls on the individual alone. If you screw it up, that's your problem. Freedom's just another word for nothing left to lose.

Generally, we want people to reap the benefits of their own successes and pay a price for their failures. But Social Security and Medicare are designed to protect people from things they have little control over?-risk of illness, risk of macroeconomic change, risk of industrial obsolescence. To manage that kind of risk, you have to do it collectively. What's more, as the political scientist Jacob Hacker has pointed out, Americans' everyday lives are considerably riskier than they used to be. Jobs are less secure. Health-care costs are increasingly difficult to plan for. And the pace of technological change?-which can lay waste to entire industries almost overnight?-is faster than ever. So now may not be the best time to undermine the few programs that provide people with some protection against bad decisions and bad luck.

As for choice, behavorial economists will tell you that it is possible to have too much of a good thing. A plethora of choices can be paralyzing, as Barry Schwartz pointed out in his recent book "The Paradox of Choice." Ask shoppers in a supermarket to taste six different jams, and odds are that they'll buy the jam they like best. Offer them twenty-four different jams, and odds are they'll walk away without buying any. Studies of 401(k)s show that the more investment choices a plan offers, the less likely people are to participate in it. In this regard, Social Security's lack of flexibility may actually be a virtue. People sacrifice some upside, in exchange for peace of mind.

The ownership society's greatest flaw, however, is that it won't solve the problems it purports to address. A real solution would require facing up to some thorny issues?-raising the retirement age, slowing the growth of benefits, means-testing. By advocating greater freedom and independence, while failing to explain or account for the greater risk, Bush is setting Americans up for an unpleasant surprise. If his plans are implemented, a lot of people are going to end up a lot poorer in their old age than they otherwise would have been. (A lot of people will end up a lot richer, too.) The result would be Social Security without the security part. Freedom of choice is a beautiful thing. But the Bush plan is asking you to swap an insurance policy for a lottery ticket.