<<  <  >  >>

THE PERILS OF

GOVERNMENT INVESTING

by Michael Tanner

Introduction

Speaking at a 1998 national forum on Social Security

reform in Albuquerque, President Clinton suggested that the

only way out of Social Security's looming financial crisis

without devastating tax hikes or benefit cuts is to "take

advantage of the higher return on investment" in private

capital markets.1  The president's remarks reflected a

growing consensus that private investment is the key to any

future Social Security reform.  But what kind of private

investment?  And who should do the investing?  Those ques-

tions will be at the heart of the upcoming debate over

Social Security's future.2

On one side of the debate are those calling for indi-

vidually owned, privately managed accounts that allow indi-

vidual workers to divert their Social Security taxes into

accounts similar to individual retirement accounts or 401(k)

retirement plans.  Workers would own their accounts and--

within defined limits--control their investment choices.

This would be a "defined-contribution" plan, under which

workers' accumulated retirement benefits would depend on the

amount of workers' contributions plus the return they earned

on individual investments.

Others have proposed a continuation of the current

Social Security system's "defined-benefit" approach: setting

workers' retirement benefits by law without relation to

individual contributions or investment.  Under such a plan,

however, a portion of the current Social Security surplus

would be invested in private capital markets by the govern-

ment itself, bringing a higher rate of return to the system

as a whole.

Superficially, that approach offers some attraction.

It promises the advantages of higher returns through private

capital investment, while spreading individual risk and

minimizing administrative costs.  In reality, allowing the

government to control such an enormous amount of private

investment, in the words of Federal Reserve Chairman Alan

___________________________________________________________

Michael Tanner is director of health and welfare studies at

the Cato Institute.