Uncle Sam on Wall Street? No.


The Washington Post, Tuesday, December 8, 1998; Page A21

Not long ago, who would have believed that a consensus would now be gathering around saving Social Security by investing on Wall Street? But that's the big story that will emerge from the White House Conference on Social Security, set to open today.

Stocks, at the heart of nearly all pension plans, have averaged returns of more than 7 percent, after inflation, since the last century. Social Security's returns are nearing zero for new retirees and, starting in 2013, taxes won't cover benefits. But stocks could keep the system solvent.

President Clinton suggested last summer in Albuquerque that the only way to end the crisis, short of tax hikes or benefit cuts, was to "take advantage of the higher return on investment" in stocks. He's right. But there are two distinct approaches to moving payroll-tax dollars into the market:

(1) Let workers set up personal retirement savings accounts, similar to 401(k) plans, or IRAs, which they would own themselves.

(2) Keep Social Security much as it is, but boost its trust fund by giving the federal government responsibility for investing about $1 trillion in the market. In other words, Uncle Sam buys stocks.

While the two approaches look similar, there is a huge difference. Letting Americans choose and own their retirement investments certainly involves risks, but having Washington become a major shareholder in U.S. corporations presents terrible dangers and could undermine the system of free enterprise itself.

Politicians can't resist interfering. That's been the experience with smaller state-employee pension plans, according to research by Yale Prof. Roberta Romano, who says that money is often directed to "social investments" or local companies with lobbying clout.

Michael Tanner of the Cato Institute notes that about one-quarter of the plans prohibit investment in firms that fail to meet foreign policy goals or that sell cigarettes or alcohol or "even companies that market infant formula to Third World countries."

As a result, Olivia Mitchell of the University of Pennsylvania found that between 1968 and 1986, "public pension plans earn[ed] rates of return substantially below those of other pooled funds, and often below leading market indexes."

But backers of centralized government investing claim that a neutral board could oversee the process. That's wishful thinking. As Alan Greenspan, the chairman of the Fed, told Congress, "I don't know any way that you can essentially insulate government decision-makers from having access to what will amount to very large investments in American private industry."

Under one plan, the trust fund would hold more than $1 trillion (in current dollars) in stocks by 2015, making it the largest shareholder in scores of the biggest coporations, with the potential to influence key business decisions. No wonder Greenspan worries that such a system would "have far-reaching potential dangers for a free American economy and a free American society."

Imagine even a "sterile" investment in an index fund based on Standard & Poor's 500. Would politicians let taxpayer money buy shares of tobacco companies such as Philip Morris and RJR Nabisco Inc., which represent 2.4 percent of the S&P, or $24 billion out of that $1 trillion to be invested?

What about buying $33 billion worth of Microsoft Corp., the largest S&P stock and a company that the government is prosecuting on antitrust charges? Or stock in firms that use cheap foreign labor, trade with unsavory countries or spread pollution?

Americans are well aware of the dangers if Uncle Sam goes to Wall Street. A survey published in the latest Democratic Leadership Council magazine, asked: "Which would you prefer: government investment of the Social Security Trust Fund in the stock market, or setting up personal savings accounts that individuals could invest?" Personal accounts were favored by 67 percent; government investment by 21 percent.

A plan backed by Democratic Sens. Daniel Patrick Moynihan and Bob Kerrey would allow workers to move up to 2 percent of their pay—which now goes to Social Security taxes—into IRA-style accounts that they would own themselves. They would create their own wealth, which they could use for retirement or pass on to their children or to charities—options foreclosed by the current system.

"Private ownership completely alters the relationship between the government and the individual," writes Carolyn Weaver of the American Enterprise Institute. Exactly. And that's one big reason labor leaders and others on the left oppose this direction for Social Security reform.

But it is low-income workers, minorities and young people, especially, who are penalized under the current system. Heavy payroll taxes consume cash that could have gone to investment. Over the past 17 years, the stocks that make up the S&P have increased 15-fold.

Is the market risky? In the short-term, yes, but in the long-term (and that's the nature of retirement investment), no—as extensive research has shown.

Uncle Sam shouldn't be an investor, but every American should. To reform Social Security along those lines would be a magnificent legacy for Bill Clinton.