Why does the left hand not know what the right is doing?
Have you ever wondered why something as simple as pension policy has become so complex? To me, it seems that different parts of the governmental brain are making policies without communicating with each other. This is an international problem that some countries suffer from far more than others.
Many of my friends are involved in pension policy in different parts of the world and they all face a similar challenge. For workplace pensions, there are two governmental entities involved, which makes a relatively simple problem unnecessarily complicated. When I learned about “split-brain syndrome”, its parallels with what happens when an organisation becomes too complex were stunning. Large organisations, as well as governments, should beware of the significant risks it poses.
The right hemisphere of the human brain is for spatial judgement and the left focuses on putting its perceptions in words. Normally they collaborate because they are connected by a massive bundle of fibres (called corpus callosum). Split-brain syndrome occurs when the main connection between the left and right hemispheres is severely damaged. This impacts the behaviour and the subjective awareness of the individual.
The most famous example of this is the patient “Joe” who the neurobiologist and Nobel laureate Roger Wolcott Sperry and his colleague Michael Gazzaniga studied in the 1960s. Joe’s corpus callosum was severed in surgery to alleviate extreme epileptic seizures. In a series of experiments Joe sat in front of a computer screen with a dot in the centre. Words and illustrations quickly appeared on the screen to the left and to the right of the dot to study how the two halves of the brain process information.
On one occasion, a drawing of a handsaw appeared to the left of the dot and a drawing of a hammer to the right. When asked what he had seen, Joe replied “a hammer” (because the right eye is connected to the left hemisphere that focuses on language). Joe was then asked to close his eyes and draw what he had seen using his left hand. Joe had drawn a handsaw (because the left eye and hand are connected to the right hemisphere that focuses on spatial judgement). When asked, Joe could not explain in words why he had drawn a handsaw.
Origins of split-brain pension policy disorder
In pension policy, two parts of the governmental ‘brain’ are involved. One department focused on social security and the other on state finances. To produce a viable long-term pension policy, they should act together, but in most countries the connection between these two halves is severed physically, emotionally and conceptually.
One half spends money, while the other manages the budget. One half is responsible for social security legislation, and the other for financial market legislation. Both parts are located in different buildings and their civil servants hardly meet each other. They have developed two completely different and independent mindsets.
The finance department often embraces traditional economic equilibrium models, has strong beliefs in efficient market hypothesis and rational agents. This is probably because these beliefs make the budget process and economic policy manageable by providing a (false) sense of control. This department is the most prestigious place to work for civil servants and its minister is second only to the prime minister.
The ministry dealing with social security is often more modest and hands-on since they are dealing with people. Consequently, they are generally more open to understanding how individuals actually behave and applying lessons from behavioural economics.
“UK” - the model patient
We can see this pattern in almost every country, but the place that provides the most explicit example of split-brain policy disorder is the UK and its pension policy developments.
Many years ago, the Department of Work and Pensions (“DWP”) embarked on a long-term plan for dealing with pension coverage. Historical financial incentives did not have the intended consequences; too few were saving for their retirement. To solve this problem, a commission, headed by Adair Turner, was set up to discuss the core problems thoroughly and broadly. Leading behavioural experts were involved and lessons from other countries were studied.
At the end, based on how individuals act in real life, the choice fell on a paternalistic approach. Each employer must offer workplace pension, but the employee can choose to opt-out. To make sure that also small companies had access to workplace pension, the government set up the National Employment Savings Trust (“NEST”), which cannot turn down an employer. Overall, this was truly impressive policy work that spanned decades. Its results can be felt and it has been largely successful.
The UK’s finance department (“HM Treasury”), the other part of the governmental brain that is in charge of the taxes and financial market regulation, decided overnight to change the fiscal treatment of withdrawing pension savings. The Treasury announced pension freedoms legislation in 2014. There was no debate, no discussion, no experts looking at alternatives. No default choice was introduced. It was largely an ideologically-driven decision based on rational agent assumptions. A purely libertarian approach that allows anyone to withdraw their pension at 55.
Some argue that the pension freedoms legislation was driven by short-sighted motives: to increase short term tax revenues and election tactics, but the conundrum remains. For the savings phase, the DWP chose a paternalistic approach based on inclusive discussions and latest findings in behavioural economics. The Treasury, without any motivation, chose a purely libertarian approach for the retirement phase. It is fascinating that these two policy decisions were conceived in one country.
Seeing the world for what it is…
The lesson from split-brain policy disorder is that we must create a massive bundle of fibres that connects the two parts of the governmental brain. Luckily this is much easier than reconstructing the corpus callosum in a human brain. A governmental brain whose halves are acting together, combined with policy discussions based on how individuals behave in real life, will make it much easier to create robust long-term pension policies.