One of the biggest potential dangers of the White House plan to create a private investment option as part of Social Security is the incentive it would create for the government to interfere with the markets.
Under the type of program favored by the White House and most free-market economists, a worker could channel a portion of his or her payroll tax into a personal investment account similar to an IRA or 401(k) plan. The investment options probably would be limited to a small group of index funds, similar to those offered in the federal employees' 401(k)-style Thrift Savings Plan (TSP).
And therein lies the rub. Who would decide which funds are approved? Government officials would - and they'd do it by limiting investment options to a few index funds. It's not hard to envision special interests pressuring Congress or the White House to require the Social Security investment funds to exclude certain stocks- or to use inclusion of certain stocks as leverage to force companies to change their ways. For example: Suppose a fund held shares in a tobacco company, or in a company being sued for sex or race discrimination. Suppose the fund owned stock in a company that sells products made by sweatshops in China.
Also politicians would have an even stronger incentive than they have now to use US fiscal and monetary policy to create a perpetual bull market and keep the economy and markets artificially booming. That's because the bigger personal accounts get before retirement, the smaller the traditional Social Security benefits would be - and the less it would cost the government.
And even the most sincere effort to limit political interference would, itself, require Washington to interfere in the market. Because limiting investment options to a few index funds would in effect channel hundreds of billions of dollars into a few thousand, or even a few hundred, companies, thereby excluding thousands of others. …