Tuesday, May 16, 2006

At last, superannuation I can understand

As an economist, people often ask me what the changes to the superannuation laws will mean for them. My response is that when I work out what the previous laws meant, I might have a hope of working out what the changes to those laws would mean. Frankly, all I know is that the government forces me to save and wants me to believe I am getting some form of tax advantage by doing so. In my mind, however, it is all a tax since I have no choice to do what I currently do and can't work out what it would mean to actually do more. [Given that I am being forced to do something, it stands to reason that I would not ordinarily want to do more so maybe it is all quite easy].

[From Marginal Revolution], Forbes has a new "Why Not?" article by Ian Ayres and Barry Nalebuff on how to encourage retirement savings. Now this is a scheme I can understand. Here is the relevant bit:

A lottery savings ticket would look just like a lotto ticket, scratch like a lotto ticket, cost a buck and pay out the same prizes. The only difference would be that half the revenue would be earmarked for a personal retirement savings account rather than for education. There would still be about a third for prizes and the remainder for administering the game. Setting up a personal retirement account would be no more difficult than setting up a mutual fund. Players would receive a swipeable card that would automatically credit a portion of each losing ticket to the player's retirement account...

Some 20 million Americans spend at least $1,000 a year on lottery tickets. For these heavy purchasers the new tickets would increase their personal savings by $500 a year. Invested over 40 years, these savings tickets would generate an expected retirement nest egg of $200,000. This is a lot of money for the mostly not very prosperous crowd who buy lottery tickets every week.

It seems to me that this is nothing short of brilliant as it mirrors, but in a more transparent way, what we currently do. We take money and put it into a casino called a mutual fund in the hopes of 'making it big.' The problem is that it takes a PhD in finance to calculate the probabilities on that whereas a lottery is fairly easy. Indeed, all of our consumer protection laws in this area try to bind funds in putting information in lottery-like terms.

In the end, however, you are just putting the money into yet another lottery but in a way that shares risk across individuals.

Ironically, the objection that will prevent this from ever happening is that it would encourage gambling. Yeah, clearly getting people to put their hard earned money directly into the stock market is completely different!

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