Keep Government Out of the Stock Market
by Fred E. Foldvary, Senior EditorPresident Clinton has proposed investing some of the surplus funds of the Social Security system in the stock market. The chairman of the Federal Reserve Board, Alan Greenspan, spoke against this idea, arguing that this would, over time, give the federal government political power over the stock market. Milton Friedman has calculated that if Social Security had started out being invested in the stock market in 1937, its trust fund value would now be $7 trillion. Social Security, and therefore the federal government, would own more than half of all domestic corporations.
Those advocating federal government ownership of stocks argue that over the very long run, the return on stocks has been higher than the return on treasury bonds, so why not let Social Security cash in? One problem is that the system will be depleting its trust fund during the 21st century as the percentage of those collecting funds grows relative to workers being taxed. If there is a depression when the government will be selling stocks, then there will be a shortage of funds. The "very long run" includes many business cycles during which the market can fall substantially.
The argument for Social Security stock-market investments claims that the government can set up an impartial board to make the investments, insulating it from political pressure. In practice, government investing is always subject to politics. State governments cater to special interests in channeling their stock market funds, reducing the return. Even the Federal Reserve Board, which is independent in setting monetary policy, is subject to political influence both because its members are appointed by the President and by Congress, and because the whole organization is a creation of Congress, and can be uncreated or changed any time.
Some also argue that since state and local governments invest in the stock market, why not also the federal government? The answer is that pension-fund investments by state and local governments are decentralized into many decision-making bodies. Social Security funds would concentrate large investments into one body. Also, there would be a conflict of interest when the federal government pursues anti-trust policy and regulations on companies it partly owns. For example, there would be political pressure not to invest in tobacco companies or in Microsoft when the government is acting in a legal and political adversarial role against these. There would be also political pressure to use government voting power to influence corporate policies.
Is the era of big government over? Not when the president is proposing a policy that would greatly expand government control over the economy. So long as a Social Security trust fund exists, it should be invested in US treasury bonds. These are safe, and keeps Social Security out of economic meddling.
But what about the higher returns from the stock market? The social security system could be reformed the way Chile changed its system in 1981 to a privatized, defined-contribution system. This would be an individually managed savings program, like IRAs. Social Security payroll taxes would be directed to Personal Retirement Accounts controlled by the individual. Those who prefer safety could buy US treasury bonds, while those who want a higher return with some volatility could invest in stocks. Eventually, the Social Security system would be phased out, replaced by PRAs.
The current Social Security system is an annuity, paying the recipient for life. PRA investors could choose to fund personal annuities that would pay them for life upon retirement. PRAs controlled by individuals would help increase savings and investment without the problem of political control of the economy and of companies. After privatization, Chile's economy has grown at 7 percent per year, twice as fast as the US economy. Those who retire then get a much higher return than social security. This is a win-win for workers and the economy. The only losers are government officials deprived of the extra power to meddle.
For more information, see these web sites:
What is your opinion? Share it with The Progress Report:
Page One Page Two Archive Discussion Room Letters What's Geoism?
Copyright 1999 by Fred E. Foldvary. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means, electronic or mechanical, which includes but is not limited to facsimile transmission, photocopying, recording, rekeying, or using any information storage or retrieval system, without giving full credit to Fred Foldvary and The Progress Report.