SSP No. 6 January 14, 1997

Social Security

Privatizing the Social Security Trust Fund? Don't Let the Government Invest

by Krzysztof M. Ostaszewski

Krzysztof M. Ostaszewski, the 1995 Fulbright Research Fellow in the area of social insurance, is the actuarial program director at the University of Louisville. He is a member of the Social Security Committee of the American Society of Actuaries.


Executive Summary

Given Social Security's dire financial condition, there is growing interest in attempting to harness the power of private capital markets to bail out the faltering system. However, despite its surface attractiveness, allowing the government to invest funds from the Social Security trust fund in private capital markets would be a terrible mistake that would have severe consequences for the U.S. economy.

It is easy to see why this approach has appeal. The trust fund is currently "invested" in government bonds. Allowing this money to be invested instead in private capital markets would appear to give the trust fund an opportunity to earn a much higher rate of return. Using this return to fill in some of the gap between future revenues and benefits would reduce the need for future tax increases or benefit cuts.

In reality, however, this approach is fraught with danger. Allowing the government to invest the trust fund in private capital markets would amount to the "socialization" of a large portion of the U.S. economy. The federal government would become the nation's largest shareholder, with a controlling interest in nearly every American company. Government ownership brings with it serious problems of government control and is a threat to the efficiency and competitiveness of the U.S. economy.

Moreover, experience in other countries has shown that government investments seldom achieve the rates of return seen in private investment. Attempts by the government to manipulate the markets could further undermine returns and threaten general market stability.

A much better approach would be to let individuals invest their own retirement money through true privatization. A system of individual private investment accounts, like that in Chile, would allow people to benefit from higher market returns without risking increased government involvement in the economy.



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