Opinion Editorial | |
| Wednesday, January 27, 1999 | |
Perils Of Trust Fund Investing
|
Clearly, the most important and controversial proposal made by Bill Clinton in his State of the Union Address is to invest some of the Social Security Trust Fund in the stock market. In this way, he appears to be doing something meaningful to shore-up Social Security for future generations without fundamentally changing the program. In many ways, however, the Clinton plan is worse than doing nothing at all.
Most criticism of the Clinton plan involves politicizing the investment decisions. It is feared--quite rightly--that if the federal government were able to buy shares in private corporations this power inevitably would be used to influence corporate decisionmaking. For example, companies threatening layoffs or resisting unionization might be pressured not to do so, and those making politically incorrect products or investment decisions would fear a government sale of their stock, causing the price to fall. Does anyone believe that government stock managers would ever be allowed to buy stock in tobacco companies, to name just one obvious case?
Political pressure can also come on the buy side, with the government buying stock in politically favored companies that do not have good growth prospects. Typically, this is what has happened in other countries where governments have invested pension assets in stocks. According to a 1994 World Bank study, the result has been low or negative returns on such investments -- much lower than those enjoyed by workers who invest their own pension assets (see figure).
The Clinton Administration will respond that no individual investment decisions will be made by the government. It will put the estimated $700 billion it plans to invest out to private managers, as the nation's big corporations do now with their pension funds. Or the funds could be invested solely in broad mutual funds that own all companies in, say, the Standard & Poor's 500 index. This, it will be said, eliminates the dangers of political control.
Of course, the potential for political control will still remain. Investment companies contributing heavily to Democratic candidates will, no doubt, get the inside track on getting contracts to manage the government funds during Democratic administrations and Republican firms will tend to do better when their party is in power. Also, managers will try to curry favor with political leaders by investing according to their party's philosophy. Already, for example, there are mutual funds that invest only in "socially responsible" companies; i.e., those that toe the line of political correctness.
But even if all the funds are invested in a S&P 500 index fund there would still be problems. For starters, why should only the biggest companies benefit from the government's largess? There are thousands of small companies with publicly traded stock. Investing only in large companies will bias investment in the economy as a whole, to the detriment of growth. But allowing investments in small startup companies will greatly increase the risk of loss. So it is hard to see how government funds could be invested without active management.
Finally, as Federal Reserve Chairman Alan Greenspan argues, simply shifting the trust fund out of bonds and into stocks will do nothing to increase the overall rate of return. If the trust fund buys fewer bonds it will raise the interest rate the government must pay. If it buys stocks, it will reduce the return to stocks for the private sector as a whole, because there will be less stock for private investors to own. In the end, nothing is added to the nation's wealth.
Investing the trust fund in stocks is too risky. It is a bad idea that should be firmly rejected.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, January 27, 1999.
Home | Support Us | All Issues | Social Security Debate Central | Contact Us |
