A consensus seems to be building among many Democrats as well as Republicans that reform of Social Security should include investing at least some of participants' contributions into the program in equities.
Yet investing itself will be no solution, and could cause a host of problems, if it comes under terms being kicked around by Rep. Earl Pomeroy, D-N.D., who still is considering other ideas. He proposes the Social Security system itself invest in the stock and bond markets. This well-meaning idea would allow beneficiaries to enjoy gains in the markets, but not its deep risks. That's appealing.
Social Security should be privatized. But participants should be allowed to invest their contributions through their own individual Social Security accounts. Supporters of privatized Social Security should not compromise on this goal; they should not compromise by agreeing to let the government invest the funds.
A host of problems would arise if the government were to make Social Security investments. Social Security eventually would wind up owning a huge share of the market, which would give the government too much control over individual stocks and bonds. A government-operated Social Security operation would exert too much market influence on security prices and liquidity, and too much shareholder and bondholder influence on corporations. With each purchase or sale, it would express an opinion that would influence decisions in the investment community.
By having so much money in the markets, Social Security would face demands to intervene with new regulations to protect investments in downturns, interfering with the normal course of the markets.
Another problem is the government would face demands for social investing. Indexing would be no remedy. Should Social Security own tobacco stocks? What about investing in Microsoft Corp. when the Department of Justice has launched antitrust actions.
In the event of steadily rising markets, how much of the gains would be passed on to participants, and how much would politicians reserve for other programs? In the event of market downturns, what would be the standard benefit the government would support, and how much, if any, would be financed from other government revenue? How much would the government finance by reducing Social Security benefits, or raising contributions?
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 avoid concentrating ownership of the market in a single government entity subject to intense political pressure.
Testifying at a subcommittee of the House Ways and Means Committee, Paul Huard, senior vice president for policy and communications at the National Association of Manufacturers, expressed well the idea of individual privatized Social Security accounts: "(W)e have a responsibility to our workers and particularly their children to move from a system of intergenerational wealth transfer based on taxes to a system of retirement planning based on investment and compound interest."