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paid by current workers are not saved or invested in any way

but used to pay benefits to current retirees.

Two factors brought the concept of government investing

back into public debate.  First, following a series of

Social Security reforms in 1983, the Social Security system

began to run a modest surplus.  Second, demographic trends

made it clear that the program's pay-as-you-go structure was

not sustainable.

Proposals for government investment first appeared in

legislation in the early 1990s.  The idea received wide-

spread public attention when 6 of the 13 members of the

1994-96 Advisory Council on Social Security recommended the

investment of up to 40 percent of the Social Security Trust

Fund in private capital markets.8  As Robert Ball, author of

the proposal, put it, "Why should the trust fund earn one

third as much as common stocks?"9

Proposals for government investment have now been

endorsed by a handful of economists, including Henry Aaron

of the Brookings Institution and Peter Diamond of the Massa-

chusetts Institute of Technology.  Government investing is

reportedly the centerpiece of Social Security reform legis-

lation being developed by Rep. Earl Pomeroy (D-N.D.).

Proponents of government investing claim that it would allow

the government to reap the benefits of the higher returns

available in private capital markets but would incur lower

administrative costs than individual accounts and would

allow the government to spread the risk of poor investment

performance.

On the surface that approach may have some appeal; in

reality it is fraught with peril.

Corporate Governance

Allowing the government to invest directly in private

capital markets raises serious questions of ownership and

control.  At its peak, the Social Security Trust Fund will

contain approximately $2.9 trillion.  The total value of all

2, 723 stocks currently traded on the New York Stock Ex-

change is about $12.8 trillion.  It is obvious that allowing

the federal government to purchase stocks would give it the

ability to obtain a significant, if not a controlling, share

of virtually every major company in America.  Experience has

shown that even a 2 or 3 percent block of shares can give an

activist shareholder substantial influence over the policies

of publicly traded companies.10