"Clinton Leads Toward a Plan to Invest Some Soc. Sec. Taxes in Market"

Nathan Newman nathan.newman at yale.edu
Fri Dec 11 07:31:50 PST 1998

-----Original Message----- From: joshua william mason <jwm7 at midway.uchicago.edu> To: lbo-talk at lists.panix.com <lbo-talk at lists.panix.com>

> Carl makes a good point. Any privatization plan in the end will
> specify that all proceeds go to a specific list of mutual funds (even if
> there is some provision for opt-out). The reason there has to be a core
> set of funds is that administering individual accounts for most working
> class SS savers would be an administrative nightmare

-But isn't exactly that "administrative nightmare" the motivation for -privatization in the first place?

No. Social security in its present form has the lowest administrative costs in every objective study. The argument for change is that even with higher administrative costs, higher returns from investments in equities will more than make up for the higher administrative costs. The latter argument is challenged in a number of other studies that point out that privatization will lead to higher borrowing costs by the government (since demand for Treasury bonds will drop if social security funds go to Wall Street rather than Fed bonds) and to a variety of other costs of privatization.

-I should add that according to some recent Peter Hart polls, it's the -security of an account with their name on it, rather than higher returns, -that gets people interested in privatization. So private accounts might -actually go down more easily than the kind of "partial privatization" -schemes you're talking about.

Partial privatization where the funds go to specified mutual funds would keep the name on the account aspect of privatization, but would avoid the administrative costs of collecting FICA taxes each month from employers and dispersing it to 180 million different investment plans and options.

Now, for a lot of reasons, any privatization is too administratively complicated and will inevitably cost more, since politically, it seems unlikely we will really leave the market "losers" in poverty, so there will be pressure to socialize the market losses, while letting the market winners keep their extra market winnings - inevitably increasing the overall costs of the SS system.

The Left should have a strategy for the privatization side of the debate only as a backup, not as a front-end advocacy. But we should be preparing for it, even as we campaign against the "Wall Street takeover of social security."

> One other kicker to this debate that few mention is that Social Security
> invested funds, unlike normal investments, should not follow traditional
> fiduciary rules of looking for the highest return. Given the choice
> between capital-heavy, low-wage industries and labor-heavy, high-wage
> industries, Social Security funds should be invested in the later for
> simple fact that promoting the later itself increases the FICA taxes
> back into the system.

-Interesting idea, but are you aware of *anyone* who's actually advocating -this? The AFL-CIO sure isn't, nor are any of the big affiliates, and -they'd be the logical candidates.

Not that I know of.

-But in fact, unions have *never* been able to use their pension funds in -the ways you suggest. In the early 60s the UMW tried to use investments in -utilities as a way to get leverage over the coal companies, and were -slapped down by the courts. Today, under ERISA, accepting concessionary -returns to achieve some other goal is simply illegal, even in cases where -your argument about a better overall performance because of higher -payments into the fund applies, e.g. building-trades funds investments in -union construction projects.

-f pensions haven't been able to depart from fiduciary rules even though -the arguments have made over and over, and there's a real constituency -pushing for it, what makes you think Social Security will when no one is -even talking about it?

Actually, CALPERS and a number of state pension funds have done active social investment in limited areas. The disinvestment campaign from South Africa was a success.

And the right is talking about the dangers of social investment by the government. That is one of the reasons that full privatization is being pushed so hard by the Right.

In reality, the Right is not most alarmed by the theoretical bankruptcy of social security fifty years from now, but is most alarmed at projected massive surpluses when, on paper, the federal government will have trillions of assets in the Social Security trust fund. It is a massive bulge that looks alarmingly like the government takeover of the national capital marketplace.

Of course, fiduciary laws restrict flexibility on that now, but the Right recognizes the overwhelming temptation and opportunity that will be for leftwing grassroots mobilization over use of those surpluses. Most leftists don't see changes in ERISA as a rallying point, but they would as those surpluses grow.

--Nathan Newman

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