Opinion Editorial | |
| Monday, April 20, 1998 | |
Pitfalls of Investing Social Security Trust Fund |
There is growing support in Congress for allowing workers to invest some
portion of their Social Security taxes in private retirement accounts.
Even Democrats like Senators Daniel Patrick Moynihan (N.Y.) and Bob Kerrey
(Neb.) now support such a move. A key reason for the popularity of this
idea is the prospect of a higher return. If someone could invest their
Social Security contributions in the stock market they would be able to
get a return several times higher than what they can get from Social Security. This has led some die-hard defenders of the status quo to suggest a compromise:
investing some of the Social Security trust fund in the stock market. This
will allow the Social Security system to capture the higher rates of return
without relinquishing government control, as would happen with private accounts.
Such a proposal was put forward by several members of the Social Security
Advisory Council last year. And just recently, Canada has moved to invest
some of its public pension assets in the stock market. By law, Social Security
assets now may be invested only in U.S. Treasury securities. There are two major problems with the idea of investing trust fund assets
in stocks. First is the danger that political pressures will influence
investment decisions. This problem is common at the state and local level,
where public employee pension funds are privately invested. There have
been a number of cases where such funds have been pressured to invest in
state or local government bonds, to support local businesses, or avoid politically
disfavored investments, such as South African companies during the 1980s.
In short, state and local government pension funds have not always been
free to invest for the highest return and often have been constrained by
political considerations. The likelihood is even greater that Social Security assets would be politicized.
One former Social Security trustee, Labor Secretary Robert Reich, even
pushed a plan that would have forced private pension funds to invest in
"economically targeted investments." These would be investments
in assets supposedly yielding large social benefits, but little in the way
of profits. In short, Reich hoped to raid America's private pensions to
subsidize government programs. Fortunately, Congress put a stop to this
effort before it got started. The second problem with investing the Social Security trust fund in stocks
is that shifting its assets out of bonds into stocks will alter the rates
of return on these assets. All other things being equal, rates of return
on stocks will fall and returns on bonds will rise. As Federal Reserve
Board Chairman Alan Greenspan put it in a December 6, 1996 speech, "if
the Social Security trust funds achieved a higher rate of return investing
in equities than in lower yielding U.S. Treasuries, private sector incomes
generated by their asset portfolios, including retirement funds, would fall
by the same amount." In other words, there is no "free lunch" from simply changing
the way Social Security trust funds are invested. If so, then doesn't this
also mean that there is no benefit from allowing individuals to invest some
of their Social Security taxes in stocks through personal saving accounts?
The answer is that the main benefit from allowing individuals to save some
portion of their Social Security taxes is from expanded labor supply. People
will be encouraged to work more because their Social Security tax rate will
be reduced, and will also be encouraged to postpone retirement in order
to increase their pension assets. The case for Social Security privatization is strong, but there are no
short cuts. Source: Bruce Bartlett (senior fellow, National Center for Policy Analysis),
April 22, 1998. Home | Support Us | All Issues | Social Security Debate Central | Contact Us |