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Should the government invest the trust fund?
December 24, 1998
| Q. Sen. Grams R-Minn.: There will be a great debate going on over the
next couple of months on how to reform our Social Security system, on
how to make it solvent. One approach would be to let the government invest
part of the Social Security trust fund surplus into the financial markets.
Would you believe this is the right direction to go?
A. Chairman of the Federal Reserve Alan Greenspan: No,
I think it's very dangerous...I don't know of any way that you can essentially
insulate government decisionmakers from having access to what will amount
to very large investments in American private industry...I know there
are those who believe it can be insulated from the political process,
they go a long way to try to do that. I have been around long enough
to realize that that is just not credible and not possible. Somewhere
along the line, that breach will be broken.
-Testimony before the Senate Banking Committee, July
21, 1998
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A handful of analysts has proposed solving Social Security's
fiscal crisis by allowing the government to invest the trust fund in private
capital markets.
On first glance that proposal has merit: investment in stocks
and bonds would have a higher rate of return than do traditional government
bonds.
However, this approach is extremely dangerous. Never in the history
of America has there been a proposal to hand over so much power and responsibility
to unelected, and largely unaccountable officials. Specific risks include
- The government would have a controlling interest in nearly every American
company. The trust fund would contain approximately $2.9 trillion at its peak-nearly
25 percent of the total value of all stocks traded on the New York Stock Exchange.
Experience has shown that even a 2 or 3 percent block of shares can give a
shareholder substantial influence over the policies of publicly traded companies.
- The selection of stocks would almost certainly be politicized. Should Social
Security invest in tobacco companies? Companies that pay high corporate salaries
or do not offer health benefits? Today, approximately 42 percent of state,
county, and municipal pension systems have restrictions targeting some portion
of investment to stimulate the local economy or create jobs.
- Market stability and efficiency would be jeopardized, as the government
would feel pressure to manipulate the market in an attempt to increase rates
of return.
- Government investments seldom achieve the rates of return earned by private
investment.
See Krzysztof Ostaszewski's report Privatizing
the Social Security Trust Fund? Don't Let the Government Invest and
Michael Tanner's paper The
Perils of Government Investing to learn more about problems associated
with government investment.
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