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.
