Given Social Security’s dire financial condition–the program will run a deficit as early as 2012–it is easy to understand why 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 Senator Daschle is attracted to such an approach. The Social Security trust fund is currently “invested” in special government bonds, a procedure that allows the federal government to borrow the trust fund and hide the real size of the federal deficit. Allowing the trust fund money to be invested instead in private capital markets would provide an opportunity to earn a much higher rate of return. Using that 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, that 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 major American company.
Those who suggest that the federal government could resist meddling in the companies it would own vastly underestimate the political pressures that government faces. What if a company whose stock was purchased by the Social Security trust fund decided to move its operations overseas? Should the administrators of the investments of the trust fund remain indifferent to the plight of the company’s workers, who after all will be future beneficiaries of the system? Shouldn’t the trustees at least attempt to convince the company to retain its American operations?
Moreover, beyond issues of direct control, government investment of the trust fund invites a host of questions about what types of investments should be allowed. For example, should Social Security be allowed to invest in cigarette companies? Other controversial issues are easy to imagine. Should Social Security invest in nonunion companies? Companies that make nuclear weapons? Companies that pay high corporate salaries or do not offer health benefits? Companies that do business in Burma or Cuba? Companies that extend benefits to the partners of gay employees? Companies that fail to extend benefits to the partners of gay employees? The list is virtually endless.
Senator Daschle suggests that the trust fund’s investing privately would be the equivalent of the investment currently done by state public employee pension funds. But the experience of such funds suggests exactly why that is a bad idea. Public employee pension funds have long been subject to controversy. For example, at one time more than 30 states prohibited the investment of pension funds in companies that did business in South Africa. At least 11 states restrict investment in companies that fail to meet the “MacBride Principles” for doing business in Northern Ireland. Companies doing business in Libya, other Arab countries and communist states have also been barred from investment.
Some states have additional restrictions on investing employee pension funds, including requirements for investing in in‐state companies, home mortgages, and alternative energy sources, including solar power. In some states investments are prohibited in companies that are accused of pollution, unfair labor practices or failing to meet equal opportunity guidelines. Some public employee pension funds are prohibited from investing in the alcohol, tobacco and defense industries. In a recent example, the city of Philadelphia announced it would sell its employee pension fund’s Texaco stock because of alleged racist practices by that company.
Imagine all those controversies taking place at the federal level, with the retirement benefits of millions of elderly Americans hanging in the balance.
The Daschle approach is an attempt to gain the benefits of privatizing Social Security without surrendering government control. A much better answer to Social Security’s problems is true privatization, allowing young workers to redirect their payroll taxes to individually owned, privately invested accounts, similar to 401(k) plans or individual retirement accounts.
That approach would preserve Social Security’s solvency and allow young workers to earn much higher retirement benefits–without giving the federal government control over most of the U.S. economy.