Commentary

Social Security Assets Are Best Left in the Hands of an All-Knowing Government

This article appeared in Investor’s Business Daily on Novmeber 18, 2005.

Thank your lucky stars that the advocates for Social Security reform have lost the battle. Their attempt to tamper with the largest government program in the world would have subjected all Americans to a risky scheme and the unbearable costs of two oddball ideas that started to go out of style about 40 years ago: individual choice and personal responsibility.

With reformers’ misguided efforts now behind us, proponents of the government’s rightful role in shielding us from risk should bask in their success. They have protected each of us from ourselves.

Their victory, however, doesn’t mean that Social Security’s financial challenges are over. It does mean that we now know better how they will be met, and it gives us an opportunity to explore how best to employ the government to meet additional challenges.

Starting around 2017, and for the indefinite future, the payroll tax will be less than projected benefits. This year only $90,000 of wages is subject to the payroll tax rate of 12.4%. This means that an average-income family has all of its wages taxed, but the rich family doesn’t. The wealthy should have all of its wages taxed and contribute more to society’s needs.

Bad economics? No way; it is part of our culture as evidenced by the income tax wherein we take more from those according to their abilities and give more to those according to their needs.

Taxing the rich more is actually pretty clever because they don’t need all of their income, though they surely want it. This means that they’ll work even harder if their taxes are raised so they can continue to shop till they drop. For the greater good, the government ought to mine this field.

These new revenues, plus the near-term positive cash flow, should be invested in our capital markets to garner the higher returns that the reformers rightly understood. However, the owner of the assets should be the government.

This makes sense on several levels. First, the government could spread the risk inherent in capital markets across age and income groups. That is, when the market does well, the government would pay retirees less and save the excess for a rainy day.

All retirees, therefore, would get equal benefits no matter what the market did or what they paid in. And the rich — well, they would pay more during their working years.

This would level the playing field and promote equality of results by making the rich poorer. This neat outcome can’t be accomplished if individuals owned the assets, because some people would retire when the market is in the doldrums and get less than those who cashed out at a market top.

Different outcomes caused solely by chance should be illegal. Thismayappear to run counter to state-run lotteries, wherein by chance alone somebody wins a million bucks, but it isn’t. The state uses lottery revenues for higher causes, ones that individuals can’t appreciate and wouldn’t support.

With the trillions in assets that eventually would accumulate, the state could favor certain groups for the benefit of social solidarity. For instance, if the fund’s assets were to exceed projected benefits, the government could allocate a small portion to those who have special needs. Politicians in Washington are in the best position to know who these people are and, therefore, they, not we, should make these choices.

With the owning of stocks and bonds in American companies, the government finally would be able to sit in the corporate driver’s seat. We have all heard of the Enrons, selfish CEOs and how managements have failed. Only the power of the government, with its enlightened understanding of what is best for society, would be able to put an endto all of this.

Those of us who would still own some stocks and bonds would thus get better protection against loss from poor corporate governance.

Also, the government could direct management strategy. It is virtually impossible for the management of a corporation, even a large one, to have access to all information within the government. It makes perfect sense to leverage this trove of knowledge by requiring management to follow government dictates. This would benefit all stock holders and society as well.

With the government owning vast amounts of corporate America, it would be a formidable negotiator. For instance, it would get the lowest fees for asset management, custody and the recordkeeping necessary to pay the appropriate amount to each retiree. Imagine what these fees would be if individuals controlled and had personal property rights over their assets.

Although its fees would be lower, the financial services industry would benefit in other ways. For instance, it would need to target fewer prospects because most of the assets would eventually be controlled out of Washington. Marketing, distribution and travel costs would tumble.

Also, the government may be interested in strictly limited investment strategies such as indexed funds. Investment firms could therefore dramatically reduce portfolio management overhead.

One of the selling points for Social Security reform with individual accounts and personal property rights was that individuals could bequeath some of their accumulated wealth to their loved ones. This can be accomplished more efficiently through government ownership and control.

There is no need, nor is it fair or appropriate, for a wealthy individual to bequeath assets to his loved ones — who in their own right are probably well off.

The government, which has information on everybody’s income and wealth, could better allocate any excesses to those who it determines should receive them. This would really take the sting out of the rich begetting the rich.

With the Social Security reformers’ defeat, society dodged a howitzer. We can now move more aggressively toward after-tax income equality, equal retirement benefits for all, a narrowing of the gap between rich and poor and, most important, an expanded role for compassionate government so that each of us is protected from risk, ourselves and the dire consequences of individual choice andpersonal responsibility.

Why didn’t I think of this?

William G. Shipman is chairman of Carriage Oaks Partners LLC and co-chairman of the Project on Social Security Choice at the Cato Institute.