During Tuesday’s State of the Union address, President Bill Clinton put forth the idea that the United States government should start investing in the stock market. This is a bad idea. Turning the federal government into a financial powerhouse is not a prudent way to save Social Security. Instead, the government should require all U.S. taxpayers to invest a fixed portion of their earnings in a mutual fund of their choice.
Clinton proposed that $2.7 trillion, out of a projected $4.4 trillion in surpluses, be used to shore up Social Security in the coming years. In particular, he suggested that in order to generate greater returns, $700 billion of the money devoted to Social Security be invested in the stock market.
One common objection to investment of Social Security funds in stocks is the risk of a huge crash in the market. The stock market, as evidenced by last year’s performance, is certainly prone to periodic gyrations. However, over the long term, which is certainly the time frame that Social Security funds would be invested, history tells us that stocks are in fact the safest place to be. The real dangers are far more subtle.
White House officials have stated that tremendous care will be taken to ensure that this investment scheme stays apart from politics. This is an unattainable goal. Surely boycott-happy members of the American public would find some reason to complain about the stocks in which the government invests. Moreover, imagine the government suing a tobacco company in which it holds a 15 percent share. Regardless of what safeguards might be attempted, the decision of where to invest $700 billion is not one that could be made without public scrutiny.
In addition, knowing where the government was planning to invest would be incredibly valuable. Even if the investment decisions could be made in an apolitical manner, significant incentives would exist for government managers to behave in a corrupt fashion. The knowledge of where and when the federal behemoth would make transactions would be priceless to unscrupulous traders wishing to engage in illegal dealings.
One proposal is to model the U.S. Social Security system on the one used in Chile, where all workers are required to invest a portion of their salaries in a private fund. Such a system would allow all Americans to take part in Wall Street’s wealth creation as well as bringing about the same investment boom for the American economy that Clinton’s plan would accomplish. Individuals who had previously been unable to invest would now find themselves enjoying the same benefits as the wealthy.
The government must not become an investor in the stock market. Keeping the Social Security system in its current form would be preferable. However, ideally the system will be reformed to allow everyone to generate wealth of their own through investment. With a privatized system in place, Americans in their 20s and 30s could be confident that they will participate in the Social Security system when they retire.