Monday, May 16, 2005

Craig Newmark has a post criticizing those who say the average American is too dumb to manage their own retirement portfolios...

Well, I've got to disagree with him. For the most part, Americans are pretty dumb when it comes to their finances.

Craig makes a four-part argument. His first point is to advance what he acknowledges to be a tired rhetorical point by asking, "If people can't be trusted to manage their retirement money, there must be many other decisions they shouldn't be making...". Actually, there are many other decisions they probably shouldn't be making. Just because Americans are free to do stupid things in some areas of the lives, it doesn't mean that they should be allowed - or even encouraged - to do stupid things in every area of their lives. It's fine for society to define certain areas off-limits.

Craig's second point, pointing out that the rich economists cited are rich, is neither here nor there (whatever that exact phrase means, I don't know, but I've always wanted to use it). Just because someone is or isn't something doesn't make them unqualified or qualified to speak expertly on that subject. Let's look at this another way: take someone who's 50 years old and has a negative net worth and who claims that he is smart enough to manage his own retirement finances. Are we to take him at his word just because he is not rich?

I won't argue with his third point, but it is irrelevant. The question is whether I'm smart enough to manage my own retirement, not whether I'm smarter than the Members of Congress. Granted, I don't want to trust Congress with my financial future - but that doesn't mean that I'm smart enough to do it on my own.

In the same way, his fourth point about people not "needing to be smart" to survive sounds good. People don't need to know how computers work in order to buy one. They don't need to be able to make their own clothes or build their own houses. People need to be really smart about one thing (whatever it is that they do for a living) and smart enough to make good decisions about the things in life for which they have no expertise.

And, this is the crux of the matter: for the most part, Americans are not smart enough to make good decisions about their finances. They don't save enough. They don't know how much they need to save for retirement. They chase bad investments. They take financial advice from losers and thieves. They spend too much on consumption. They don't get good value for what they do spend. They pay more in taxes than they need to (at least those who aren't engaged in tax fraud). For those who take exception to this indictment, let me ask: do you really need to take off your socks to count the number of people that you do know who have their act together?

Granted, not every American does the wrong thing. But enough of them do to allow for an indictment of the class as a whole. And, given the stakes involved - the hit to the public purse for the money that society will need to bail out the stupid and the foolish, I don't think it's unreasonable to base policy on the lower common denominators. Even if that means that I don't get to realize the benefits of being one of the people truly smart enough to do it on my own...

On the other hand, I don't think much of the other options either.