A consensus is building among many Democrats as well as Republicans that reform of Social Security should include investing in the public markets at least some of the contributions participants make into the program.
This will convert the Social Security System from a system that merely redistributes part of the nation's wealth to the elderly from the young to an investment system that adds to that wealth for all.
Yet investing in the markets will be no solution -- and could cause a host of problems -- if it comes under terms suggested by a report on a legislative proposal being drafted by Rep. Earl Pomeroy, D-N.D.
Mr. Pomeroy would propose the Social Security system itself invest in the stock and bond markets, according to the report.
The idea would allow beneficiaries to benefit from the gains in the markets but not bear the risks of market downturns.
Ideally, Social Security, if it were being started today, should be fully privatized.
But given where the system is today, it should be at least partially privatized, allowing participants to invest part of their contributions through their own individual Social Security accounts.
Supporters of privatized Social Security should not compromise on this latter goal; they should not agree to allowing the government to invest the funds.
With the government investing Social Security, a host of problems likely would arise.
Among them, Social Security eventually would wind up owning a huge share of the equity and bond markets and give the government too much control over individual stocks and bonds. With each purchase or sale of a stock or bond, it would be expressing an opinion that would influence decisions of the investment community.
With so much money in the markets, the government could face demands to intervene with new regulations to protect investments in downturns, interfering with the normal course of the markets. The government also would likely face demands for social investing.
Indexing would be no remedy. Should the Social Security system, invested through an index fund, own tobacco stocks, for example? What about investing in Microsoft Corp. or Intel Corp., when the Department of Justice and the Federal Trade Commission, respectively, have launched antitrust actions against the companies? Would the Social Security System feel obliged to sell?
And when the Social Security trust fund experienced the long-term returns of the equity markets, how much of the gains would be passed on to participants and how much would politicians seek to divert to other programs?
Many politicians are realizing the Social Security System should operate in a way similar to a private pension plan.
Having a real trust fund, not just the notional one appearing in government accounts, and having a broad array of investments in stocks and bonds and other assets will enhance the security of the benefits and help increase the value of the benefits.
The trust fund should have individual accounts, allowing each beneficiary to invest according to his or her own view, and it should avoid concentrating ownership of the market in a single government entity subject to intense political pressure.