Recent research in behavioral economics shows that behavior is very inertial. Ve
ID: 1168247 • Letter: R
Question
Recent research in behavioral economics shows that behavior is very inertial. Very small costs of switching can have enormous effects. For example, if employees are asked to enroll in a high interest rate savings plan through work, most employees will not sign up. However, if employees are automatically enrolled and then asked if they want to unenroll, then most employees will end up enrolled. The net savings rate in the U.S. before the crisis was approimately 0% (at times, it was negative!). Suppose the U.S. government could raise the savings rate by 10% by automatically enrolling workers in a private savings plan. Moreover, suppose the government, allowed anyone to simply unenroll by filing a simple one page form. In other words, suppose that the U.S. changed the default on private savings. This has often been called libertarian paternalism. (1.) Why is it called libertarian paternalism, (2.) In what ways is it different from social security and (3.) do you think it is a good idea? Note that there is no one right answer to the third part of this question.Explanation / Answer
Libertarian paternalism is the idea that it is both possible and legitimate for private and public institutions to affect behavior while also respecting freedom of choice, as well as the implementation of that idea.It means that people who believe rationally or irrationally will accept the changes made. The firms which raised the default rate instantly raised the contribution rates of their employees. When people behave rationally default will not matter as they will know that a particular saving plan will help them. similarly irrational behaving persons will not save in a saving plan as they can't think that it is a way to help them to save.
2. libertarain paternalism limits individual choice whereas social security is a paternalised way of old saving where people know the advantages of savings for their own old age as in a retirement plan. Libertarain Paternalism forces them to save by restricting their personal choices by influencing them.
3. social security is a better idea above libertarain paternalism as people get to decide by themselves and they will end up choosing what is beneficial to them.
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