Becker to Uncle Sam: Keep Your Hands Off Wall Street

Friday, July 30, 1999

The temporary surpluses anticipated for Social Security in the next fifteen years provide breathing room to begin extensive reform of that system. President Clinton is right to worry about the long-term solvency of Social Security, but his proposal to buy stocks with about $800 billion of that surplus is both dangerous and misguided.

If the president’s desires are implemented, the government will eventually accumulate about 5 percent of all issues listed on American exchanges and will become the biggest stockholder, far larger than any other public or private fund. Treasury officials claim that the government could avoid political interference by hiring private managers with a mandate to invest in a broad-based portfolio. That claim is incredibly naive, given the American political process and other governments’ experience with stock purchases.

State pension funds with stocks in their portfolios have sometimes allowed political considerations to override economic returns, such as when they dumped tobacco stocks and those of companies doing business in South Africa. Perhaps a more relevant example is provided by Sweden, where the Social Democratic government in the early 1980s began investing tax revenues in Swedish stocks, with an aim of promoting industrial democracy. But even that left-leaning government shortly abandoned the plan as too controversial and unpopular, even among union members.


The economic temptation to add stocks is understandable since equities in the long run have yielded much higher average returns than government bonds. But this is because returns on equities are much riskier. That explains why private pension funds investing mainly in stocks, such as TIAA-CREF, do not guarantee a fixed retirement income.

With so many signs of degeneration and regeneration, how is it all going to turn out? We don’t know. But now it is at least a contest in which we have a fighting chance.

Yet the president wants to continue to guarantee retirement incomes. This is possible if equities make up only a small share of total Social Security assets, but then why bother? If equities do become a sizable part of Social Security assets, however, fixed income guarantees would require that public borrowing or other taxes make up the shortfalls during possibly protracted periods when stock markets yield below-average returns.

This is an opportune time for America to take the more radical step of following the examples of Argentina, Britain, Chile, Mexico, Singapore, and other nations that in recent years have fully or partially privatized their social security systems through individual retirement accounts. Especially when there are thousands of competitive mutual funds and many other opportunities to save, as in the United States, the government has no more reason to be running a massive pension system than it does to run steel or life insurance companies.

Of course, it is politically hard to dislodge a government social security system, partly because the transition from a pay-as-you-go public system to private individual accounts involves an extended period of so-called double taxation: Younger workers are taxed to finance the incomes of retired persons, and they also must save to accumulate assets to finance their own eventual retirement.


Financing such a transition is more palatable during a period of budgetary surplus, such as the United States is now enjoying. For instance, Chile’s highly successful switch to a privatized system began in 1981 during a period of sizable surpluses.

Privatized systems have several advantages that are not fully appreciated. They help insulate retirement incomes from powerful lobbies of the elderly, such as the American Association of Retired Persons. They also allow retirement plans to be tailored to individual needs and preferences. Individuals who can bear more risk, perhaps because they own their houses outright, would prefer to hold retirement portfolios that are more heavily weighted with equities and other less stable assets.

Private accounts also permit healthy persons who like their jobs to work past the usual retirement ages without having to give up part of their retirement incomes. All citizens might have access to their retirement accounts at age sixty, and they could then individually decide how much longer to work.

In an important earlier speech, President Clinton declared that “the era of big government is over,” but his last State of the Union Address gave little evidence of this. He could take a giant step toward his stated goal of smaller government by starting the process of converting to a universal private retirement system over the next couple of decades. Individuals would then be able to save for retirement with their preferred mix of equities and bonds, and they would also choose their own best time to retire.