The four co-authors are a senior financial economist
with the Federal Reserve Bank of Chicago, a senior economist with the Board of
Governors of the Federal Reserve System, and two high-profile professors of
finance who teach respectively at New York University and at Harvard: Sumit Agarwhal, John C. Driscoll, Xavier Gabaix, and David Laibson.
Their brief was published last month by The Center for Retirement Research at Boston College. I linked to it from Ronni Bennett's first-rate blog about aging, Time Goes By'. (Her comments about it are worth reading.)
Here's a summary of the paper:
The authors first present a quick overview of studies that they say show a) That the prevalence of dementia, and of cognitive impairment without dementia, rises rapidly with age; and b) That older adults as a result make more financial mistakes than mid-age adults.
They then propose several potential solutions to this problem. The older you are, the more offensive you'll find most of their suggestions. As Ms. Bennett says, some of them are appalling. But mostly, I'm struck by how slap-dash and superficial this brief is considering the credentials of its authors and publisher; it reads more like something knocked out in a spare half hour than the result of serious thought.The authors' first (and
in my view best) suggestion is for the government to
strengthen financial disclosure requirements -- i.e., make it easier for people to understand
financial products and services, whose drawbacks typically now are hidden in fine print and
legal jargon. But they immediately dismiss this solution. "We are skeptical that improved disclosure will be effective in improving financial choices," they write.
They give only one reason: "In
one recent study, employees with low savings rates were randomly assigned to a
treatment in which they were paid $50 to read a short explanation of their
401(k) plan, including a calculation of how much money they would personally
gain by taking full advantage of the employer match. Relative to a control
group, this group did not significantly increase its average 401(k) saving
rate."
From this, you conclude that improved disclosure doesn’t work?
('Wow, this explanation has really opened my eyes! I never realized before that our retirement savings would grow much faster if we raised our 401(k) contribution enough to qualify for the full employer match!' 'That's great news, honey! Let’s raise our
contribution right away!’'
Their other proposed solutions:
1. A new requirement that people pass a financial test before being allowed to make 'nontrivial' financial decisions, such as 'opting out of 'safe harbor' investment products.'(The studies
cited in the brief show that young people and old people both tend to make more foolish money
decisions than middle-age people. So although the authors don't say so, a financial test makes the most sense as part of a high school course in personal finance; presumably, refresher courses could be offered to older people. For the record, few high schools currently have a personal finance course requirement; and the 'educational materials' for the few courses that are offered often are provided by financial services firms. As for 'safe harbor' investment products, to the best of my knowledge, the only such products today are offered as options in some, but by no means all, 401(k) plans.)
(All of this would require sweeping legal changes. As I
periodically explain in response to questions about wills and estates, the law's current assumption is that people are entitled to do what they want
with their own money. You won't have much luck contesting your old man's will
if your only argument is that he made an irrational decision in leaving
everything to his worthless, unfaithful, mean-spirited trophy fourth wife instead of to his
loving children. During his lifetime, you can challenge his capacity to make financial decisions -- but the burden of proof is on you to show that he's not competent to manage his own affairs. Moreover, the laws governing financial competence and guardianship matters are state laws. The authors of this brief presumably are talking about new national, i.e., federal requirements.)
3. Maybe we should have regulators monitor new financial products for adverse effects. (Why wait for new products? Why not monitor existing financial products for adverse effects?) Or maybe we should require that new financial products obtain explicit regulatory approval before being marketed. (I can already hear the screams of protest about how this would stifle innovation!)
Okay, okay -- as the authors themselves concede, these solutions face a host of political and economic hurdles.
But perhaps the most striking thing about their paper are its two
underlying assumptions: First, that after reaching adult maturity, most Americans make good financial decisions until
they reach old age; and second, that most poor financial decisions are attributable to dementia
and/or cognitive impairment.
Given recent history, those are remarkable assumptions!
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(c:) Lynn Brenner, All Rights Reserved
