'Ownership society': why the US can't buy in

Many Americans - perhaps most of them - aren't ready for President Bush's "ownership society." The idea sounds good. Employees could shift a portion of what they pay into Social Security and put it into individual accounts that might gain higher returns in, say, the stock market.

They could also reduce their tax bill by starting Health Savings Accounts, Retirement Savings Accounts, and Lifetime Savings Accounts.

These options reflect a certain conservative logic. Rather than having the government or your company decide how much retirement money or healthcare you get, you can decide for yourself.

"If you own something, you have a vital stake in the future of our country," Mr. Bush explains. "The more ownership there is in America, the more vitality there is in America."

The flaw in this logic is Americans' lack of financial sophistication. For example: Less than one-quarter of working-age people characterize themselves as "knowledgeable investors," according to surveys by John Hancock Financial Services. Even this minority shows "considerable confusion." For example: Many surveyed thought money-market funds included stocks and bonds.

That doesn't mean Americans are stupid. They just have better things to do.

"Many people don't have the time, inclination, or expertise necessary to take full responsibility for their own well-being in areas that are so complex as assuring they have sufficient income for retirement or choosing a health plan appropriate for their circumstances," says Robert Reischauer, president of the Urban Institute, a Washington think tank.

Moreover, many Americans would have trouble reading the documents involved in such decisions. Some 44 million adults at the lowest of five levels of literacy were unable to decipher simple texts and documents, according to a decade-old survey by the Department of Education. Even the larger number of people at the next level of literacy would find financial reports and documents difficult.

Because it goes to the heart of the liberal-conservative divide over the role of government, the ownership society sparks political controversy.

"Boneheaded, wacky, breathtakingly threatening," writes Greg Palast for AlterNet, a liberal website set up by the Independent Media Institute. It's "lopping off a chunk of Social Security insurance revenue for gambling in the stock market."

On the conservative side: The ownership society "tends to encourage self-esteem and healthy habits of behavior, such as acting more for the long term, or taking education more seriously," argues David Boaz of the Cato Institute, a libertarian think tank in Washington.

But judgment doesn't need to rely on rhetoric. The United States already has experimented with transferring the major responsibility for retirement savings from employers to employees. It's the 401(k) plan, which got going in the 1980s.

Workers are "overwhelmed" by them, argues Boston College's Alicia Munnell, who with Annika Sundén wrote a new book, "Coming Up Short," on these popular retirement plans. For example:

• Only 25 percent of eligible workers join the plan. (The Bush private accounts will be voluntary for younger workers.)

• Ninety percent of those participating contribute less than the maximum.

• Almost 60 percent of participants have undiversified portfolios, with almost all their money in stocks, or in bonds and other fixed-income investments. About 20 percent of 401(k) assets are invested in the stock of the company employing the workers - risky indeed, as Enron employees found out.

• Hardly any participants take time to rebalance their portfolios as they age or the market changes. About 55 percent of them cash out their accumulated funds when they leave a job, instead of saving the money for retirement.

The result is that those currently approaching retirement (aged 55 to 64) have, on average, about $50,000 in their 401(k) plans. That's only enough to generate $300 a month - little to top up the $900 average Social Security payment.

So, if Americans are really hungering for the new options offered by the ownership society, wouldn't a larger number of them be invested in 401(k) plans or other plans, such as Individual Retirement Accounts?

"People are quite comfortable with collective insurance plans," such as Social Security or Medicare, Mr. Reischauer says. Thus he doubts Congress will take the risk of privatizing them, even if Bush is reelected.

At least one conservative offers a solution to some of these shortcomings. The ownership society is "an attempt to modernize early and mid-20th century institutions" to take account of differences in today's demography, health system, and retirement patterns, says Michael Boskin, chairman of the Council of Economic Advisers under the first President Bush and an adviser to his son.

A variety of protections could be built into a system of private accounts, he says in a telephone interview, such as limiting investments to only a few generic, indexed investments, or a default mix of stocks and bonds.

"People could be prevented from taking extreme fliers," he says. And if invested in private accounts, people would have an incentive to learn more about how to invest safely and wisely.

Of course, investing in the markets always carries risk, as Americans found out with the recent dotcom bubble. Should people be fooled again by "irrational exuberance" or misleading financial ads, millions of people could end up with slim savings at retirement.

Would they starve? Probably not. The nation might revive the means-tested support of pre-Depression days. It would be a costly choice.