George Akerlof and Robert Shiller make a series of puzzling and inconsistent claims in their chapter on savings in Animal Spirits. In the section on “Why Conventional Theories of Savings Have It Wrong” they argue that Americans save too little. The evidence? Americans save more and are happy with it when enrolled in a Thaler-style Save More Tomorrow plan. And when you ask them, most Americans say they save less than they'd like to. I find their remarks about standard life-cycle savings models glib. But, sure.
But then A&S say that government old-age retirement pensions are a response to undersaving. Well, maybe. But doesn't everybody know social insurance crowds out self-insurance, at least to some degree? If we're confident that Social Security will deliver on its promises, we'll obviously feel less need to save than we would otherwise. (We may even choose to have fewer children — the oldest form of self-insurance.) Indeed, many Americans think (and are encouraged to think) that their payroll taxes — their “Federal Insurance Contributions” — are a form of retirement savings, though they're really just another tax legally unrelated to transfers received later in retirement. A&S decline to address the fact that Social Security depresses the savings rate, though they do begin their chapter praising Martin Feldstein!
Even better, they work themselves into a self-congratulatory lather about Bush's failed attempt to reform Social Security by introducing a system of mandatory retirement savings. Of course, they don't mention that's what the proposed policy was, conveniently sparing them the trouble of explaining away the fact that it would have significantly increased the national savings rate. They just call the policy “privatization” and move on.
Why did Bush's attempt to reform Social Security fail? A&S say most Americans opposed it because retirees depend pretty heavily on their Social Security transfer checks. Maybe so! But the fact that retired Americans do depend so heavily on Social Security would, again, tend to explain why retirement savings aren't higher. You can depend on Social Security! But this is what A&S choose to say: “People depend on [Social Security] because their own retirement savings are so scant.” I can't say they're wrong!
But wait, it gets better! In the next section, “Savings and the Wealth of Nations,” they jump right into singing Singapore's praises for having “adopted the strategy of saving their way out of poverty.” They go on to explain the Central Provident Fund in glowing terms. Now, the CPF is a system of mandatory savings including mandatory retirement savings. What is that a heckuva lot like? Why, the Bush administration's plan to “privatize” Social Security! Just one page after dumping on the idea, A&S now love it!
However, they conveniently manage to describe Singapore's mandatory savings program without mentioning that it finances the retirement and health-care system. Reading A&S, you might think Singapore just forces people to save money and that's the end of it, though they do hint that it's funding something. Of Singapore's unmentioned social insurance system financed by its mentioned system of mandatory personal savings accounts they say:
The system has not been “pay-as-you-go,” and the sums collected have really been invested. Largely because of the CPF, the gross national savings rate has been in the vicinity of 50% for decades.
Not only has this been just terrific for Singapore's savings rate and rate of economic growth, A&S claim its stunning example has totally transformed China!
[Lee Kuan Yew's] high-saving economy became a model for China, which has copied Singapore's savings achievement and have been achieving significant economic growth fore decades.
So you might think that it wouldn't have been a disaster had the U.S. followed Singapore's example and replaced its “pay-as-you-go” tax and transfer retirement pension system with a system of mandatory personal accounts actually invested in the market. But, no. They hide the dots so the reader can't connect them. They really do seem to go out of their way to prevent the reader from grasping that the Social Security reform proposal they deride was a mandatory savings program and that the mandatory savings program they praise finances retirement security.
Akerlof has a Nobel Prize. Shiller is a Nobel short-lister. So it's hard to pin this on ignorance or incompetence. What's going on!? Let's jump back a page to Akerlof's “personal footnote” about Social Security reform.
[Akerlof] was on a panel of economic advisers (a minor one) to the Kerry campaign in 2004. Up until the elections we had a conference call every two weeks. From the very first to the very last of these calls, Akerlof asserted that Kerry should affirm his support for maintaining Social Security in its current form. Toward the end, Austand Goolsbee (who is now a leading adviser to President Barack Obama) would joke, “And now we will hear from George, who will say that Kerry should demagogue the Social Security issue.”
LOL! George goes on to explain that he thinks Kerry lost because he didn't demagogue the Social Security issue like he said he should. And then two paragraphs later, we get to read about how awesome the Central Provident Fund is.
This bit of Animal Spirits gave me whiplash. It's incoherence is simply overwhelming if you happen to know a bit about pension systems and retirement savings. Maybe we're seeing an unresolved problem of dual authorship. I don't know. What I do know is that this section of the book really does convey the impression that some care was taken to omit very relevant details, and therefore to create a misleading picture — an impression only reinforced by Akerlof's joshing, self-approving anecdote about his reputation for promoting demogogeury on Social Security. As Akerlof and Shiller are both phenomenally accomplished scholars who I'm sure have well-deserved reputations for intellectual honesty, I expect they'll want to revise this section for the paperback edition of their book.