Page 2
Greenspan, "has very far reaching potential dangers for a
free American economy and a free American society."3
The Current System
Social Security is currently running a surplus. In
1996, for example, Social Security taxes--both payroll taxes
and income taxes on benefits--amounted to $385.7 billion.
Benefit payments and administrative expenses totaled only
$353.6 billion, resulting in a surplus of $70.8 billion.4
Under current law, that money must be invested solely in
U.S. government securities. The securities can be any of
three types: government securities purchased on the open
market; securities bought at issue, as part of a new offer-
ing to the public; or special-issue securities, not traded
publicly. In actual practice, virtually all the securities
purchased have been special-issue securities,5 which earn an
interest rate equal to the average market rate yield on all
U.S. government securities with at least four years
remaining until maturity, rounded to the nearest one-eighth
percent--an average of approximately 2.3 percent above
inflation.
By contrast, equities have earned an average 7.56
percent real rate of return over the past 60 years. Some
have suggested that the government should be allowed to
invest a portion of the Social Security surplus in equities
rather than government securities, allowing the Social
Security system to reap the benefits of the higher rate of
return.6
Proposals for Government Investing
The idea of allowing the government to invest excess
Social Security funds in private capital markets is not a
new one. As early as the 1930s, fiscal conservatives warned
that unless private securities were included in the govern-
ment's portfolio, the trust fund would earn less than market
returns. But they also realized that if the government
invested in private securities, it would lead to large-scale
government ownership of capital and interference in American
business. Sen. Arthur Vandenberg (R-Mich.) warned that "it
is scarcely conceivable that rational men should propose
such an unmanageable accumulation of funds in one place in a
democracy."7 In the end, Congress rejected not only gov-
ernment investing but any system of full funding, establish-
ing a pay-as-you-go program in which nearly all the taxes