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THE PERILS OF

GOVERNMENT INVESTING

MICHAEL TANNER

BY

No. 43

December 1, 1998

Executive Summary

The current Social Security system is unsustainable.

As President Clinton has pointed out, the only alternative

to tax increases or benefit cuts is to increase the rate of

return to investment of Social Security funds.  That means

either allowing individuals to invest their own Social

Security taxes or allowing the government to invest them.

Supporters of government investing claim that it would allow

the government to reap the benefits of the higher returns

available in private capital markets, incur lower adminis-

trative costs than individual accounts, and allow the gov-

ernment to spread the risk of poor investment performance.

On the surface, that approach may have some appeal; in

reality it is fraught with peril.  It could potentially make

the federal government the largest shareholder in American

corporations, raising the possibility of government control

of American business.  In addition, there are serious ques-

tions about what types of investment the government would

make.  Political considerations and "social investing" are

likely to influence the government's investment decisions,

allowing the government to manipulate economic markets.

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