Social Security Investments Must Be Made by Workers Themselves
When U.S. Secretary of Labor Elizabeth Dole was pushing for consumer protections from pension plan underfunding in 1990, no one thought to extend those protections to Social Security.
After all, Social Security is run by the federal government. It must be safe.
But the aging of the baby boomers is laying bare the fatal flaw in Social Security: It is a completely unfunded retirement program.
People and businesses that operate pension plans which are merely underfunded go to jail. A completely unfunded pension plan--a true Ponzi scheme--is rarely to be found. Social Security, however, is a $20-trillion exception to this rule.
Today, the full amount of our Social Security payroll taxes is “invested” in U.S. Treasury securities. But because these securities represent money owed by the government, they really are not an asset at all, but rather a liability. With its trust fund composed entirely of liabilities, Social Security is forced to use taxes from today’s workers to pay the entirety of its obligations to current retirees and beneficiaries.
The challenge of saving Social Security, therefore, is to convert it from an unfunded retirement plan to a funded one. The only alternatives to this conversion are higher taxes and borrowing or reduced benefits. In fact, the Social Security Board of Trustees has determined that keeping the program solvent for today’s 35-year-old worker will require increasing payroll taxes to 18% of wages or cutting future benefits by 25%.
Because these are unacceptable choices, President Clinton has proposed that we begin to invest the trust fund in real assets, thus beginning the process of converting the entire system to a funded retirement program. But instead of permitting each Social Security taxpayer to direct the investment of his or her share of the trust fund, the Clinton plan calls for government-directed investment in the stock market.
This is a terrible idea. For the federal government to own stock in U.S. companies would be a stunning reversal of the global trend toward privatization and free enterprise.
Federal direct investment in American companies--more than $700 billion in Clinton’s latest proposal--would blur dangerously the distinction between what is private and what is government. A system in which the U.S. government simultaneously invests in and regulates “private” business is fraught with conflicts. Would this or any administration resist the temptation to make regulatory decisions that could help its own bottom line?
Control over such enormous investment sums inevitably would be used to promote political agendas. The Rev. Jesse Jackson testified before the House Ways and Means Committee that he would use all of his political influence to direct investment away from nonunion companies and firms that don’t pay “fair” wages abroad.
To steer clear of these obvious political pitfalls, Treasury Secretary Robert Rubin has proposed yet another wrinkle: The U.S. government, he says, should direct its hundreds of billions in Social Security taxes into index funds. Using a well-known index, such as the Dow Jones Industrial Average, the Standard & Poors 500 or the Wilshire 5000, the government would avoid picking individual stocks and instead buy a percentage of every stock in the index.
But this is an even worse idea, because index funds are concentrated in large companies. By directing such enormous sums exclusively to big business, the government would raise the cost of capital for small firms and entrepreneurs. And it would compound this unfairness by compelling workers and managers in small businesses to pay taxes to finance their larger competitors.
For this reason, government-directed investment in the stock market would expressly disadvantage Orange County. Our region is teeming with high-tech start-ups and small- to medium-size firms, but is home to only seven Fortune 500 corporations. Our smaller firms are precisely those that would be shortchanged by the Clinton approach.
But the president is right that investing our payroll taxes in real assets, rather than government IOUs, is central to saving Social Security. The key is to decentralize the investment decision-making so that excessive government control of the economy and of individual companies does not become an issue.
Guided by millions of investors motivated solely by market rather than political considerations, investment capital in a free market economy is allocated efficiently, fairly and rationally. If it is directed by the federal government, however, special interests would lobby as avidly for it as they now argue for pork-barrel spending, vastly distorting the market.
Proposals to allow the investment of payroll taxes in the stock market--Clinton’s included-- properly are focused on replacing Social Security’s unfunded liabilities with real income-generating investments. By seeing to it that these stock market investments are directed not by the federal government but by individuals managing personal accounts, we can ensure that the cure is not worse than the disease.
