With Social Security reform apparently destined to be a key public policy issue in 1999, proposals are sprouting to allow these payroll tax dollars to be invested in the stock market -- either through individually managed 401(k)-type accounts or by having the federal government directly invest the funds. Under the latter scenario, there is a danger that investments would become politicized and that returns, and benefits, would suffer.
In fact, there have been a number of insidious attempts in recent years to politicize investments. These merit scrutiny -- both because of the measures themselves and because of what they portend for having the federal government deploy Social Security investments outside the realm of government bonds.
Political investing is typically cloaked under the heading of social investing or economically targeted investments. When the era of big government is proclaimed to be over and the American people regard tax hikes as anathema, pension fund money is a lucrative target for those who wish to propagate big government.
President Clinton, in fact, has long been tantalized by social investing. As governor of Arkansas, he imposed a minimum 5% quota on the amount of state pension funds that had to be targeted for ETIs. A 1992 campaign document called for drawing upon public and private pension fund money for an $80 billion infrastructure program.
Social investing, for the most part, has been a trendy and heretofore largely voluntary activity of a relatively small group of investors. The social or political good that is sought might include the construction of low-income housing, infrastructure development or the expanded employment of union workers. Social investors seem disinclined to believe these benefits naturally will accrue from a strong private-sector economy.
The intended social investing benefits, however, typically come at a significant cost to investors.
Even Alicia Munnell, a former member of President Clinton's Council of Economic Advisors, found in a 1983 study that targeted social investments had assets that were significantly riskier and less liquid, and decreased returns by an average of two percentage points a year.
Where pension money is involved, it is seldom -- if ever -- appropriate to undertake social investing. The Employee Retirement Income Security Act is quite clear on how investment managers must have undivided loyalty to those whose money they hold in trust.
A pension fund manager is required to "discharge his duties with respect to a plan solely in the interest of the participants and beneficiaries; and for the exclusive purpose of (1) providing benefits to participants and their beneficiaries; and (2) defraying reasonable expenses of administering the plan" (emphasis added).
A June 1994 regulation from the U.S. Department of Labor, Interpretive Bulletin 94-1, however, seeks to erode this essential underpinning of ERISA, and at the same time promote social investing.
The meandering and convoluted bulletin seeks to "clarify" the wording of ERISA by stipulating that, all other factors being equal, a pension manager may decide to make a social investment. But in the real world, all other factors are never equal when it comes to making an investment decision and money managers are seldom Hamlet-like figures.
Left unchecked, Interpretive Bulletin 94-1 provides legal and political cover for ideological or opportunistic fund managers to make investments based on politics instead of what is in workers' self interest. But of even greater concern, it provides a precedent -- and a pretext -- for the federal government to direct pension funds for political purposes.
Rep. Jim Saxton, R-N.J., chairman of the Joint Economic Committee, has noted the ramifications of the president's proposals at the national level would be sizable. A mere 5% national ETI quota would give the administration more than $175 billion for its social agenda. But there is an even greater concern as an ETI quota could erode pension returns by hundreds of billions of dollars.
To date, the administration's desire to intrude into the pension system and effectively abrogate ERISA has been held to a minimum. The potential ramifications of Interpretive Bulletin 94-1 and other measures that may follow it -- particularly direct federal investment in the stock market -- are disturbing in terms of what they might cost retirees and how the federal government may deploy large amounts of capital inefficiently. Congress should require the administration to rescind the unnecessary and potentially harmful bulletin, and track closely any activity that will seek to perpetuate the use of pension money in social investments -- particularly direct government investment in the stock market, via Social Security funds.
Paul F. Steidler is a senior fellow at The Lexington Institute, a public policy think tank in Arlington, Va.