NYTimes.com > Opinion

Choose and LoseBy BARRY SCHWARTZ

Published: January 5, 2005

Swarthmore, Pa. — THERE are three arguments being
made in favor of privatizing part of Social Security.
First, the Social Security Trust Fund needs money and
privatization will, in the long run, increase the amount of
money available to retirees. Second, privatization will
give people choice, and choice is good. And third, "it's
your money," and you ought to be able to do with it as you
wish. 

Each of these arguments is dubious, or disingenuous, or
both. 

Though experts differ on the urgency and the severity of
the problem, most everyone agrees that the trust fund will
eventually run out of money unless we do something. Two
obvious and painful things we can do are decrease benefits
or increase payroll taxes. Privatization, it is argued,
solves the problem without the pain. Equity investments
return about twice as much, historically, as Treasury
bills. So by allowing people to put some of their payroll
taxes into equity investments, we will increase the value
of that part of their retirement account so we can then
decrease the benefits paid out by the standard Social
Security program and still leave retirees better off. 

There are several problems with this argument, however. For
starters, there is no guarantee that equities will return
more than Treasury bills. One of the reasons that equities
have a higher rate of return than other types of
investments is that investors have to be compensated for
taking risks. Perhaps equities will outperform Treasury
bills in the long term but that doesn't mean that they will
be outperforming Treasury bills at the specific moment you
retire. 

For example, a person who retired in 2000 after a lifetime
of investing half in stocks and half in bonds would have
had 50 percent more in his account than a person making the
same investments who retired in 2003. A difference like
this could mean that the lucky retiree can afford both food
and medicine while the unlucky one must choose between
them. The risk inherent in equity investments is
unavoidable unless you can leave the investment alone
indefinitely, which, of course, most retirees can't do. 

What's more, the administrative costs of keeping track of
these private accounts, according to President Bush's
Commission to Strengthen Social Security, will be 10 to 30
times the cost of administering the current system, eating
up almost all of the hypothetical gains that equity
investments could provide. 

Finally, even if we grant the advantages of putting trust
fund money into equities, this is something that the
government could do without privatizing anything by doing
the investing itself. The government as investor can ride
out risks better than any individual investor, and
administrative costs would be vastly reduced. Only
brokerage houses would suffer - from lost commissions. Thus
investing in equities, which might be a good idea, is
logically independent of privatization, which is a bad one.
The Bush administration is deliberately conflating them. 

This brings us to the second argument in favor of
privatizing Social Security: giving people options makes
them better off. There is now accumulating evidence that
choice isn't always good. Whether people are choosing jam
in a grocery store, essay topics in a college class, or
even potential partners in an evening of "speed dating,"
the more options they have, the less likely they are to
make a choice. In other words, increasing options induces
people to opt out of choosing altogether, and this comes
into play when people decide how to invest their money for
retirement. 

A study by Sheena Iyengar, a psychologist, and Wei Jiang,
an economist, has shown that when employers increase the
number of funds available to employees for voluntary 401(k)
investments, the rate of participation goes down by 2
percent for every 10 funds offered. And this is true even
when participating employees get free money - matching
money - from employers. 

So whereas there is no denying that choice is sometimes
good, a case must be made for the specific benefits of
choice in each particular context, rather than just
assuming that the more choice people have, the better off
they are. The appropriately abysmal early public response
to the administration's Medicare prescription drug choice
plan provides ample reason to suspect that many people will
not regard being able to choose their Social Security
investment instruments as a blessing. 

This brings me to the final defense of privatization: the
payroll taxes you pay are your money, and you ought to be
able to do what you like with your money. This, I suspect,
is the real justification behind the move to privatize, and
it is the worst reason of all. The payroll tax is not
"your" money; it's our money. Social Security was created
as an insurance scheme, not a pension scheme. It was meant
to provide a safety net, to protect the unlucky from
immiseration in old age. The benefits we get are not
payouts from accounts in which we have accumulated our own
private stash. What we get is largely determined by what we
earned, but we keep getting it even after we've taken out
every penny we put in. And if we happen to die early,
someone else reaps the benefits of our contributions. 

The Bush administration should be honest with the American
people and ask us if we want to do away with Social
Security, without pretending that privatization will solve
the problem of financing the trust fund without pain. I
suspect that the American people would reject this effort
to transform their "old-age insurance" into another
opportunity to roll the dice in the investment casino. 

Barry Schwartz, a professor of psychology at Swarthmore
College, is the author of "The Paradox of Choice: Why More
Is Less."