A Dollop Of Paternalism

Americans cherish their freedom of choice. They're properly suspicious of rulemakers who claim to have their best interests at heart. At the same time, lots of people choose badly -- dropping out of school, blowing their savings, falling into addiction. Those who stumble can end up as wards of the state, at great expense. So steering them in the right direction is worthwhile. The goal should be to achieve the greatest effect with the lightest hand, using what some behavioral economists have called "minimally invasive paternalism."

Two articles in this issue highlight opportunities for just that. One concerns 401(k) plans. Half of U.S. households headed by people aged 50 to 59 with 401(k)s have $10,000 or less in their retirement accounts. Increasingly, employers are automatically enrolling employees in 401(k)s, while still allowing them to opt out if they insist. Some are going further, steering employees into "lifestyle" funds whose investment mix becomes more conservative as retirement nears. These are steps in the right direction.

Another opportunity for reform is credit-card borrowing. Many people max out their cards and then cross over into the nightmarish world of "negative amortization," in which late fees and interest get added on to debts that continue to grow. The question is: What intervention is effective yet not heavy-handed? The Comptroller of the Currency is pushing banks to require bigger minimum monthly payments. But these could pinch many families severely. A less invasive solution might be to impose a national limit on credit-card interest rates, making it easier for cardholders to dig out of debt.

The U.S. should never become a "nanny state." But smartly designed interventions can make just about everyone better off.

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