Prometheus 6

See if you can figure out where the behavioral economics comes in.

How to Retire Rich

If you are like most people, your sadness over losing, say, $1,000, would be twice as great as your happiness at winning $1,000. That all-too-human tendency to feel the pain of a loss more deeply than the joy of a gain is called "loss aversion" and is one of the central discoveries of behavioral economics - a branch of the dismal science that recognizes that when it comes to money, people are motivated by various impulses that are measurable and even predictable, but seldom rational.

Behavioral economics has vital implications for retirement savings. But in his zeal to privatize Social Security - a quest which is itself driven more by ideology than economics - President Bush is obscuring better approaches to a comfortable retirement for all Americans.

We all know that the benefits from Social Security do not provide enough income for a comfortable old age. But they do provide a guaranteed basic level of financial stability for all old people and, in so doing, enhance the socioeconomic well-being of everyone. And for the large majority of old people for whom Social Security makes up more than half of income, it is the difference between destitution and the ability to live with dignity. Clearly, the reliability of the income stream is critical. Mr. Bush does not want you to believe that such social and financial stability is possible. In a forum last Tuesday aimed at persuading "younger folks" to support privatization, he said that Social Security would be "flat broke" in the coming decades. That is false. The system's trustees expect that even if nothing whatsoever is done, the current system will be able to pay full benefits until 2042, when it will be able to pay 70 percent of the promised benefits. The independent Congressional Budget Office is even more optimistic. Of course, no one is suggesting that no reforms be made. But modest, straightforward tax increases and benefit cuts, phased in over generations, are all it would take to bolster the current system.