| SSP No. 6 |
January 14, 1997
|
Privatizing the Social Security Trust Fund?
Don't Let the Government Invest
by Krzysztof M. Ostaszewski
Krzysztof M. Ostaszewski, the 1995 Fulbright Research Fellow in the area of social insurance, is the actuarial program director at the University of Louisville. He is a member of the Social Security Committee of the American Society of Actuaries.
Executive Summary
Given Social Security's dire financial condition, there is growing interest
in attempting to harness the power of private capital markets to bail out the
faltering system. However, despite its surface attractiveness, allowing the
government to invest funds from the Social Security trust fund in private capital
markets would be a terrible mistake that would have severe consequences for
the U.S. economy.
It is easy to see why this approach has appeal. The trust fund is currently
"invested" in government bonds. Allowing this money to be invested
instead in private capital markets would appear to give the trust fund
an opportunity to earn a much higher rate of return. Using this return to fill
in some of the gap between future revenues and benefits would reduce the need
for future tax increases or benefit cuts.
In reality, however, this approach is fraught with danger. Allowing the government
to invest the trust fund in private capital markets would amount to the "socialization"
of a large portion of the U.S. economy. The federal government would become
the nation's largest shareholder, with a controlling interest in nearly every
American company. Government ownership brings with it serious problems of government
control and is a threat to the efficiency and competitiveness of the U.S. economy.
Moreover, experience in other countries has shown that government investments
seldom achieve the rates of return seen in private investment. Attempts by the
government to manipulate the markets could further undermine returns and threaten
general market stability.
A much better approach would be to let individuals invest their own retirement
money through true privatization. A system of individual private investment
accounts, like that in Chile, would allow people to benefit from higher market
returns without risking increased government involvement in the economy.
Index of Social Security Choice Papers
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