Social Security = Welfare

A Liberal Journalist's Confession

This from the WashingtonPost.com"

By Robert J. Samuelson Let's suppose Congress approves President Bush's "personal accounts" forSocial Security. The Social Security system would then become the largest singleinvestor in U.S. stocks. By 2050 Social Security could hold 25 percent of allstocks, estimate economists at Goldman Sachs. This estimate reflects a modestplan for personal accounts; other proposals would permit bigger stock purchases.

Hardly anyone has thought about the economic consequences of concentrating somuch stock in the Social Security system. My hunch is that it would turn out tobe a huge mistake -- or worse. The idea of personal accounts is that Wall Street should triumph over thewelfare state. Just the opposite might occur: The welfare state would triumphover Wall Street.

The money flowing into personal accounts would not be investedaccording to the "free market." Individuals wouldn't have the freedom to investin Microsoft, General Electric or eBay. Instead, it would be invested accordingto rules made by Congress, influenced by politics. There would be unrelentingpressure from interest groups, "experts" and public opinion.

The danger is that investment decisions would become unduly politicized andthat the economy would consequently suffer. The rules governing which stockscould or couldn't be purchased for personal accounts might become irrational orcounterproductive. The reason is that what personal accounts aim to accomplishis inherently difficult, perhaps impossible.

The economic and social roles ofWall Street and the welfare state are fundamentally opposed. The attempt toblend them through personal accounts would create massive contradictions. The role of Wall Street is to move investment funds to their most productive uses.

If the process works well, the economy expands, living standards rise andthe stock market advances. But inevitably there are losers, because Wall Streetis an exercise in collective risk-taking. A free market means continuous trialand error. By contrast, the welfare state is an exercise in collective risk reduction. Itstrives to provide some security -- aka the "safety net" -- against life'smisfortunes and the economy's upsets.

It aims to protect society's poorest andweakest members. We have many welfare programs. Social Security is the largestand most popular. Personal accounts would be a strange hybrid: part "private" investment, partpublic entitlement. This is a hard straddle. There's an unavoidable dilemma:Making personal accounts safer for individuals might make the stock market lessuseful -- less dynamic -- for society.

The conflict has already surfaced.One criticism of personal accounts is that they might subject beneficiaries tohuge losses, because stocks fluctuate erratically. The administration countersthat it would allow accounts to be invested only in "index funds" -- forexample, funds representing the Standard & Poor's 500 stocks.

The idea is to minimize the risk of big losses on individual or speculative stocks. Soundssensible. But it would bias the market in favor of existing companies,industries and technologies. It would discriminate against the new, exciting anddifferent.

If investment became too hidebound, it might slowly degrade the economy'sperformance. Conflicts like this won't conveniently fade away. Nor wouldpersonal accounts, if created, remain fixed for all time. As publicentitlements, they would create their own ferocious politics. Millions of Social Security beneficiaries and countless interest groups would periodicallyagitate to modify the accounts, reacting to their own experiences or interests.

The specter of rule changes would constantly hang over Wall Street; the largerthe personal accounts became, the more the rules would affect how the stockmarket behaves. What looms is a massive expansion of government power over Wall Street. To besure, it would occur gradually, over decades, and its outlines are murky.

The irony is that it comes from "conservatives." Facing the rising costs of federalretirement programs, practical politicians seek ways to cover the costs withoutresorting to unpopular benefit cuts. Putting payroll taxes into stocks seems one painless way out.

But even good stock returns can't erase the basic problem. The costs offederal retirement programs are growing much faster than any plausible portfolioof private accounts. Sometime between now and 2030, with the aging of the babyboom generation, the relentless increases in costs will force significantbenefit cuts, big tax increases or both. The bipartisan consensus is to ignorethis inconvenient fact. In their hearts, the Democrats want to do nothing.

Republicans have at least proposed something. Unfortunately, it may be worse than nothing.