Government Investment Perils

October 23, 2002

In a recent New York Times story regarding the California Public Employees' Retirement System (Calpers), Mary Williams Walsh effectively underscores the reasons that government control of pension fund investments is an undesirable and risky practice.

She writes that Calpers has "a board so activist, so eager to promote social change through investing, that…its ability to provide for the 1.3 million public employees whose pensions it guarantees are in question."

The sole responsibility of any investment management group is to ensure that investors gain as much return as possible on their money, while minimizing risks. One problem with allowing government officials to direct investments is that the funds can become political and social tools. Walsh emphasizes this by pointing out that recent changes in investment strategy by Calpers, along with specific investments in projects connected to Democrats and labor unions have "prompted some critics to level accusations that the fund has become politicized and is using its capital to promote like-minded entrepreneurs and to reward Democratic donors." She continues: "In this election year, there have also been accusations that some of Calpers's innovations are not so much about promoting democracy as about promoting Democratic politicians."

Affecting social change appears to be exactly what some members of Calpers' board have in mind writes Walsh, "Mr. Angelides (California state Treasurer and Calpers trustee) says California's vast pension fund capital offers an enviable chance to 'mobilize the power of the capital markets for public purpose.'"

Government control of investment funds can lead to inappropriate, counterproductive micro-management of corporations' practices, Walsh argues, "when investors own a large-enough stake or forge a like-minded coalition of owners, they can influence corporate policy on many issues, like capital investment, social policy and even labor relations." The personal desire to affect social or political change with investment funds is incompatible with the responsibility of investment managers to the members of a fund: "The bottom line for the board has to be their fiduciary duty to the members,' said Mr. Koppes, (former Calpers general counsel) 'But there is a challenge,' he added. 'There is a pull to use some of these funds for purposes other than the bottom line."

According to Walsh, the Calpers board might also be pursuing its own social agendas without regard to financial success. Regarding investments made by Calpers in areas considered too risky by private investors, Walsh writes, "Calpers officials said it was too early to evaluate the success of these programs. The board, however, is considering expanding them."

Government-controlled investment of the Social Security Trust Fund, which contains far greater sums than those of Calpers, would worsen the dangers involved in government control of investment funds. Providing individuals the option to direct the investment of their money through private accounts would avoid the perils of government investing and allow everyone access to the higher returns available through markets.

Please see Michael Tanner's paper, "No Second Best: The Unappetizing Alternatives to Social Security Privatization" for more information on government investing.

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