Consensus Builds on Need to Invest Social Security Funds in Market: There Is No 'Free Lunch' from Chancing How Social Security Trust Funds Are Invested

Article excerpt

There is growing support in Congress for allowing workers to invest some portion of their Social Security taxes in private retirement accounts. Even Democrats such as Sens. Daniel Patrick Moynihan of New York and Bob Kerrey of Nebraska now support such a move.

A key reason for the popularity of this idea is the prospect of a higher return. If someone could invest their Social Security contributions in the stock market, they would be able to get a return several times higher than what they can get from Social Security.

This has led some die-hard defenders of the status quo to suggest a compromise -- investing some of the Social Security trust fund in the stock market. This would allow the Social Security system to capture the higher rates of return without relinquishing government control, as would happen with private accounts.

Such a proposal was put forward by several members of the Social Security advisory council last year. And just recently, Canada has moved to invest some of its public-pension assets in the stock market. By law, Social Security assets now may be invested only in US. Treasury securities.

There are two major problems with the idea of investing trust-fund assets in stocks.

First is the danger that political pressure will influence investment decisions. This problem is common at the state and local level, where public-employee pension funds are privately invested. There have been a number of cases where such funds have been pressured to invest in state or local government bonds, to support local businesses or avoid politically disfavored investments, such as South African companies during the 1980s. In short, state- and local-government pension funds have not always been free to invest for the highest return and often have been constrained by political considerations.

The likelihood is even greater that Social Security assets would be politicized. …

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