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April 30, 1999

Social Security Socialism

Investing Social Security funds in the stock market would be a fine idea, wouldn’t it? President Clinton thinks so. Nobel laureate and Hoover fellow Milton Friedman thinks not.


President Clinton has proposed that a quarter of the funds set aside for Social Security be invested in the stock market—a truly radical plan.

Margaret Thatcher reversed Britain’s drift to socialism by selling off government-owned enterprises. President Clinton now proposes that the U.S. government do precisely the opposite: buy private equities, thereby becoming a part owner of U.S. enterprises.

I have often speculated that an ingenious way for a socialist to achieve his objective in the United States would be to persuade Congress, in the name of fiscal responsibility, to (1) fully fund obligations under Social Security and (2) invest the accumulating reserves in the private capital market by purchasing equity interests in domestic corporations.

Congress has never adopted a policy of fully funding Social Security, but neither has it adopted a strict pay-as-you-go policy. As is Congress’s wont, it has chosen the middle of the road, where cars can hit you from both directions. It has collected more in current taxes than were needed to pay current benefits yet not enough more to equal the future liability that it was incurring. The excess revenue has been spent in the ordinary course of government business.


The trust fund was created to preserve the fiction that Social Security is insurance. The so-called trust fund is actually a massive sleight of hand.


To preserve the fiction that Social Security is insurance, however, federal government interest-bearing bonds of a corresponding amount have been deposited in a so-called trust fund. That is, one branch of the government, the Treasury, has given an interest-bearing IOU to another branch, the Social Security Administration. Each year thereafter, the Treasury gives the Social Security Administration additional IOUs to cover the interest due. The only way that the Treasury can redeem its debt to the Social Security Administration is to borrow the money from the public, run a surplus in its other activities, or have the Federal Reserve print the money—the same alternatives that would be open to it to pay Social Security benefits if there were no trust fund. But the accounting sleight of hand of a bogus trust fund is counted on to conceal this fact from a gullible public.

Suppose the president’s proposed policy had been followed in its most extreme form from the outset of Social Security in 1937 (i.e., that the whole excess of Social Security tax receipts over Social Security benefit payments, not just one-quarter, had been invested in the stock market). Offhand, it looks as if the trust fund would own only about 5 percent of all domestic corporations ($656 billion out of $13 trillion).

But that is too simple. Most of the accruing funds would have been invested at far lower stock prices than those that prevailed at the end of 1997. Suppose that stock prices, dividend yields, Social Security tax receipts, and Social Security benefit payments had all been what they were—that is, not affected by the investment of Social Security funds in stocks instead of government bonds. On that assumption, the trust fund at the end of 1997 would have totaled not $656 billion but more than ten times as much, approximately $7 trillion. In that case, the Social Security trust fund would own more than half of all domestic corporations! To return to my socialist fantasy, full funding would long since have brought complete socialism.

That too is too simple. Neither stock prices nor other economic magnitudes could have behaved as they actually did, with so much extra money flowing into the market. But what this calculation demonstrates is (1) the widely recognized fact of how much better equity stocks are as an investment than government bonds and (2) how seriously the government purchase of private securities would threaten our freedom.

Have we not learned from the experience of the past century that private property is the key bulwark of personal freedom? Has that experience not shown how dangerous it is to transfer a larger and larger fraction of the productive assets of the country into the hands of a government bureaucracy?

If the corresponding sums had been accumulated by private individuals and not used to finance government spending, they would have been a real addition to the nation’s capital and not just a bookkeeping entry. Those sums would have been invested in ways citizens or their advisers chose. The end result would have been more productive investment, a larger stream of income, and a freer, more responsible, more productive society.


Click here to see the Hoover project showcasing the works of Milton and Rose Friedman.

Milton Friedman, recipient of the 1976 Nobel Memorial Prize for economic science, was a senior research fellow at the Hoover Institution from 1977 to 2006. He passed away on Nov. 16, 2006. He was also the Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, where he taught from 1946 to 1976, and a member of the research staff of the National Bureau of Economic Research from 1937 to 1981.


Reprinted with minor editorial changes from the Wall Street Journal, January 26, 1999, from an article entitled “Social Security Socialism.” Reprinted with permission of the Wall Street Journal. © 1999 Dow Jones & Company, Inc. All rights reserved.

Available from the Hoover Press is the videotape “Social Insecurity: Reforming Social Security,” an episode of the weekly television program Uncommon Knowledge, jointly produced by the Hoover Institution and the San Jose PBS affiliate KTEH.