Let’s Keep the Government out of the Stock Market

Let’s rely on consumer choice rather than top‐​down management.
April 9, 2017 • Commentary
This article appeared in The Wall Street Journal (Online) on April 9, 2017.

There is no question that Social Security needs reform. With more than $32 trillion in unfunded liabilities over an infinite horizon, Social Security quite simply cannot pay future promised benefits with existing taxes.

Much of the program’s problems stem from its pay‐​as‐​you‐​go nature, under which it is little more than a transfer payment from young to old, without any sort of investment. Transitioning to a funded system, where contributions were invested, makes sense.

Yet allowing the government itself to invest, either directly or indirectly, the roughly $2.9 trillion Social Security trust fund would be an enormous mistake.

First, it is hard to see how this would actually take place. The bonds in the Social Security trust fund aren’t actual assets, but merely claims against future general revenues (that is part of Social Security’s funding problem). To invest those funds in other assets, the Social Security Administration would first have to redeem those bonds for cash. With the U.S. running a deficit and already $20 trillion in debt, finding money to redeem the bonds likely would require either additional taxes or borrowing or both.

But even if a financial workaround could be found, the federal government should stay out of the stock market.

The total value of all stocks traded on the New York Stock Exchange is roughly $21 trillion, meaning the funds available from the trust fund would be about 14% of stock value. It is easy to see, therefore, that investing even part of the trust fund in the stock market would allow the U.S. government to purchase if not a controlling then a commanding share of virtually every major company in America.

Powerful influence

Even if the investment was done indirectly through an index, government decision makers would acquire property rights in corporate enterprises. Either they would exercise their rights, thus creating a direct political influence in the management of private enterprises, or they would give up the voting rights and other privileges, thus indirectly enhancing the power of existing shareholders.

In either case, ownership of the enterprises would be powerfully influenced by political agents, and the entire arrangement would be financed by the taxpayers.

With ownership comes control. What if a company whose stock is purchased by the Social Security trust fund decides to move its operations overseas? Would President Trump, or a future president, remain indifferent to the plight of the company’s workers? Would he or she not be tempted to use the president’s financial leverage? What about environmental concerns? Workers rights? Political contributions? What about companies that make adult movies, tobacco products or sugary soft drinks? The potential list of targets for government mischief is endless.

Would it make a difference if the government purchased existing index funds from a third party, such as an investment company?

Not really. Although the index fund would provide a layer of insulation between the government and companies whose stocks were purchased, the problems of control wouldn’t be completely avoided. First, the government would acquire control over the index‐​fund manager itself and thus indirect control over the corporations. If index fund A controls the majority of shares in company B, and the government controls the management of fund A, the government can control the company.

Another way

Even if the government doesn’t attempt to exercise corporate control, there is reason to be concerned about allowing index‐​fund managers to use taxpayer money to increase their ownership of corporate America.

In essence, it is being proposed that the federal government use tax money to pick corporate winners and losers. It is difficult to imagine a more egregious proposal for “corporate welfare.”

Those who see stock investing as a potential cure for Social Security’s woes aren’t all wrong. It is true that private investment would earn substantially higher returns than the current pay‐​go system, even under conservative projections. However, there is a way to capture the rewards from those higher returns without the risks of getting government itself involved in the investment business.

Why not allow younger workers to invest for themselves a portion of their payroll taxes in personal accounts? Let’s rely on consumer choice rather than top‐​down management.

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