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Thursday, December 22, 2011

What Layaway Plans Can Teach us about Social Security Reform

This Christmas season, to much fanfare, Walmart brought back their layaway program.

For those Internet intellectuals among us too rich and separate from the ails of the working man to understand the incentives behind layaway plans, let me explain the concept.

By purchasing an item on layaway, you select your item, put down a deposit and make regular payments until the item is fully paid off - without interest. Only then are you allowed to take the item home.

...wait, what?

Yes, that's how layaway plans work. There is no "getting the item" early advantage as with a credit system. So, we are left with only 2 possible benefits for those participating.

1) Fear of the item running out of stock.
Putting the item on layaway guarantees you securing the item once you are able to fully pay for it. However, unless the item in question is a hot Christmas toy, Walmart largely sells commodities. In the majority of scenarios, there is no real fear of the item going out of stock. Which brings us to the reality that...

2) Layaway plans are a savings tool.
Some people are fully aware of their personal financial temptations, and like being able to immediately put the money toward a specific item as soon as they get it. That way, the odds of the money being diverted to something else drastically falls.

So, what can layaway plans teach us about social security reform?

One of the biggest fears of social security privatization is that people are morons - incapable of planning for the future. And yet, here we have a free-market example of lower-income individuals using non-coercive savings programs to plan for their future. Shocking, isn't it?

Eric Olsen,
Regular Columnist, THL
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