Every discussion of Social Security should begin by recognizing that Social Security is a system of social insurance. It places government in one of its noblest roles: Provision of a bedrock guarantee to all members of society that you do not need to fear the financial consequences of growing old or disabled, for society will assure you with an income stream to enable you to meet your basic needs.
It is government of, by and for the people. It is government as it should work — a coming together of society to ensure that we, as a community, > take care of each other as we age or suffer from disabilities.
This is the opposite of government in its all-too-familiar function as provider of corporate welfare, where narrow business interests hijack government programs or agencies and convert taxpayer assets into private profits, with no or inadequate reciprocal benefits to the public.
Through the invention of social security, we have created a commonwealth. It is not just the intergenerational transfer of monies, but the affirmative creation of a security guarantee for every citizen.
These remarks focus on particular dimensions of Social Security privatization: the loss of retirement security and the consequent increase in social anxiety, along with the implications of investing some of the trust fund in the stock market. Other speakers have or will discuss other critical issues, including privatization proponents’ cooking of the books to create a false sense of crisis with Social Security, the comparative rates of return from Social Security and stocks, and how privatization would disproportionately harm the poor and minorities.
From Systemic Tranquility to Enforced Anxiety
From the consumer or citizen perspective, one of the great benefits of social security is its very certainty. As one of its great assets, it offers systemic tranquility — no matter what, people know that in old age or disability, they can count on the social security guarantee.
As soon as the system is privatized in individual accounts, in whole or significant measure, the commonwealth would be perverted into a subsidy bonanza for brokers, who would take their 2-to-5 percent cut on account maintenance and transactions, and for insurance companies who would skim their 20 percent in administrative fees, and systemic tranquility would be replaced by an enforced anxiety.
By their very nature, market investments introduce risk into the equation.
There is nothing inherently wrong with risk, of course. Risk and the returns on risky investments are an important motor in our economy.
However, most working people already confront sufficient risk — it is embedded in the increasingly unlikely prospect of maintaining a good, well-paying job for a lifetime and the uncertainty that is pervasive in the churning of the globalized casino economy. If people believe there is an upside to risk and are eager to invest in the stock market, in bonds, in hedge funds or otherwise, they are free to do so, directly or through IRAs, 401Ks and other tax-subsidized private retirement devices.
But where there is a role for risk, there is also a place for reliability and confidence in a foundational support system. Where people could rely on the protection of social security, in a privatized system they would ride the Wall Street roller coaster.
They would have to worry about sudden plunges in the market, or companies in which they had invested taking a dive, or the consequences of being taken by hucksters.
Indeed, these fears would be well founded:
What would happen if the market crashed, and people suddenly saw the source of 30 percent of their retirement income stream wiped away?
What happens to the individual who bets his retirement nest egg on the success of eight-track tapes, or beta videotaping systems?
What should the government do if it permits unregulated private individual investment, only to find that some significant portion of the populace loses its entire retirement investment account due to unlucky or misguided investments?
What happens to the old person who is ripped off through investment fraud?
There are only two possible scenarios, both completely unacceptable. The first option is for the government to maintain its commitment to providing a secure retirement income to all of the nation’s citizens, and to restore those who suffer from such ill fortune to the position they would have been in, absent the privatization scheme. This “reinsurance” would have the benefit of maintaining the social safety net, but it would also create an incentive for people to undertake unreasonably wild gambles with high potential payoffs — the economists’ moral hazard.
Where the first alternative is foolish, the second is cruel: Let the unlucky suffer. Abandon the notion of “security,” and the bedrock guarantee afforded by the current system.
The certainty of fraud
We know with 100 percent certainty that, if social security is privatized, there will be an explosion in the already startlingly high incidence of investment fraud, committed both by snake-oil hucksters and their more serene counterparts in respected and household-name brokerages.
To take a current example, earlier this month, the Securities and Exchange Commission (SEC) brought administrative actions against 28 broker-dealers, including such well-known firms as Bear Stearns, CS First Boston, Dean Witter Reynolds, J.P. Morgan Securities, Legg Mason, Lehman Brothers, Merrill Lynch, Morgan Stanley, CIBC Oppenheimer, PaineWebber, Prudential Securities and Salomon Smith Barney. The firms and various individuals agreed to pay more than $26 million in civil fines.
The types of improper conduct found by the SEC included: market manipulation through coordinated entry of bids; undisclosed coordination of quotations; the intentional delaying of trade reports; failure to keep accurate records and books. These practices harmed both customers and market participants, according to the SEC. In some cases, for example, the broker-dealers failed to fulfill their obligation for best execution of customer orders, in order to enhance the profits from executing the orders.
The brokers are not the only brandname financial companies to have been caught engaging in fraud recently. In the insurance industry, for example, in the last two years Prudential settled a class action suit alleging illegal churning and twisting for as much as $2 billion, and American General and State Farm settled similar suits for hundreds of millions of dollars.
Paralleling the improper, illegal and fraudulent activities of these major names is widespread illegality and criminality by thousands of others who haunt the financial world. Even with its inadequate budget, the SEC enforcement record books are fat with consent decrees, civil fines and criminal prosecutions. In 1998 alone, the SEC entered into nearly 400 consent decrees to settle civil and criminal litigation and took administrative action in hundreds more instances against accountants, brokers and investment firms.
Many of these cases involve pure investment scams of the sort to which the poor and the elderly — those most reliant on the guarantees of social security — are most vulnerable. According to the SEC, these scams include high-pressure sales through cold calls from “boiler room” operations, glittering telecommunications technology venture deals that are totally fictitious, “prime” bank financial instruments that often involve Ponzi schemes, and the burgeoning business of Internet investment fraud including such techniques as “pump and dump” scams, pyramids, risk-free frauds, off-shore frauds, online investment newsletters that “scalp” stocks they promote and e-mail spam.
“It is likely that giving people the ability to select investment options will provide the unscrupulous with new opportunities to deceive and distort,” noted SEC Chair Arthur Levitt in a recent address. Levitt points to the UK experience where social security privatization led to “abusive practices, [which] coupled with inadequate regulation, led to billions of dollars in losses for investors.”
Sentencing the losers
Even if we leave aside the inevitably high incidence of fraud, even if we accept for the sake of argument the misleading claim that market swoons can be ignored because over time the market will inevitably rise, and even if we agree for the purpose of this discussion with the deceptive/groundless assertion that the market will show a higher return over time than social security, we are still left with this:
The seven percent annual return which privatization proponents attribute to the market is an average — spread not just horizontally over time, but vertically among the population.
In the course of debate, there is a tendency for a dangerous Lake Wobegon effect to distort clear thinking about this: Everyone assumes they will do better than the average, or at least as well.
But of course there will be many losers, not just winners.
So again, privatization presents us with the irresolvable dilemma: Does the government encourage “moral hazard” by bailing out the losers? Or does it simply let citizens gamble away their retirement security?
To escape the dilemma, the President and others have suggested, in one form or another, that citizens be given the right to set up individual social security accounts on top of their existing right to benefits. Some argue that if such a proposal were truly in addition to and distinct from the existing system, it would be an improvement, for it would preserve the bedrock social security guarantee.
However, these proposals raise the issue of why additional government resources should go to this purpose, rather than to a straight increase in social security benefits, or to close a legitimate Medicare funding gap. These questions would be especially poignant given that a disproportionately large amount of small investment funds is likely to be siphoned off in brokers’ and insurance administrative fees and costs.
Most worrisome in the President’s proposal to create Universal Savings Accounts (USA) is the specter that over time, and perhaps just over the upcoming legislative session, these savings accounts will cease being “in addition to” existing social security payments, and will begin to displace them — thus taking us back to the already noted problems with a privatized system of individual Social Security accounts.
The President’s USA accounts also share a basic problem with all of the proposals to create personal retirement accounts: they encourage people to identify their interests with Wall Street, even though Wall Street does little to spur productive, empirical investment and even though Wall Street interests frequently contravene citizen interests in clean air and water, low prices and quality goods, good, well-paying jobs, maintaining production in the United States, workplace safety, fair recompense to victims of defective products, vigorous antitrust enforcement, campaign finance reform, low unemployment and on and on.
The specter of the corporate state
In his State of the Union speech, the President reintroduced a notion that seemed in recent months to disappear from the social security debate: the direct government investment of portions of the social security trust fund in the stock market.
Under the President’s proposal, at the end of 15 years, the government will have invested on the order of $700 billion in stocks. That will give the government ownership of 4 to 5 percent of the entire stock market.
The motivation for the proposal is to attain the allegedly higher average rate of return from the stock market. There are reasons to question the underlying assumption of high returns. As prior panelists have discussed, projected higher rates of return for the stock market are premised on an economy which is growing fast enough to eliminate the supposed 35-year social security shortfall — the very thing which underlies the entire effort to “save” social security.
But leaving aside arguments about return on investment, government investment in the market would constitute arguably the greatest corporate welfare subsidy in American history — no small feat. It would move the United States further in the direction of becoming a corporate state.
The infusion of hundreds of billions of dollars of the trust fund into Wall Street would further balloon the stock market. The most direct beneficiaries of the investment would be all existing investors: the rules of supply and demand, other things being equal, would push up the value of their stock, without their having done anything (except perhaps lobby for this proposal) and without any change in the underlying value of the companies in which they are invested. In a market that already shows ever more worrisome signs of “irrational exuberance,” inflating the bubble even further would be foolish, to say the least.
The market is already very liquidity-driven. Investing substantial portions of the trust fund would make it worse.
When a company in which the government holds a significant share faces bankruptcy or crisis, how will the executive or Congress resist the temptation to bail it out? Indeed, it might even be imprudent not to bail it out. Thus the federal government will be converted into a de facto insurer or guarantor of most large businesses.
Still more troubling is the prospect of government intervention to buttress a collapsing market. Would the President and Congress sit and watch as $700 billion in government investments shrunk to $400 billion? That’s hard to imagine. Again, public action to stave off harm to the Social Security trust fund will primarily benefit private investors, who would ride on the back of the government to escape from troubled waters — without paying any rescue fees. That’s more free, de facto investor insurance. Such action would also raise risk-taking to new speculative highs due to the assumption of a government bailout in the event of failure.
Finally, the government taking such a large stake in the stock market could force Congress to legislate with even more of an eye to serving Wall Street than is now the case. This would structurally bias the Congress and the Executive to favor a host of anti-consumer, anti-worker and anti-environmental policies: tort deform, suppression of the minimum wage, no meaningful restrictions on greenhouse gas emissions, etc.
There’s more: We’ve become strangely adjusted to newspaper headlines such as “Unemployment Rates Rise, Wall Street Applauds.” With a huge investment in Wall Street, the government itself will be structurally biased in favor of this perspective. Large-scale investment will work to lock-in fiscal conservatism and a bias toward spending favored by Wall Street (in defense, say, rather than safe drinking water). Immediately following the President’s State of the Union speech, for example, one analyst warned in the Washington Post against any change in the national economic policy of fiscal and monetary policy that would undermine the bullish era for stocks. That’s not what should be central to economic policymaking.
We plainly believe that trust fund investment in the stock market is a very bad idea. (This is, incidentally, qualitatively different than state and local pension fund and other investment in the market: those funds are diffused among hundreds of such investors, are not invested by entities or levels of government with the ability to bail out corporations or set national economic policy, and are not invested by funds with the broad and multiple functions of Social Security, including social insurance, disability insurance and insurance for children.) Should Congress and the President erroneously proceed with such a plan, with its accompanying boost to stock value, the government must at least exercise the generic rights which attach to stock ownership: the right to vote shares and influence company policy commensurate with ownership stake.
The notion that the investment portfolio should be managed by a “neutral” body and immune to outside political influence — modeled on the Federal Reserve, no less! — invites ridicule and should be rejected out of hand. The Fed model is instructive: the central bank is indeed immune to influence from citizen groups that would like to see the Fed adopt a less restrictive monetary policy, enforce consumer protection laws or support community reinvestment initiatives and promote better access to credit for poor and minority citizens and small businesses. But the Fed has been anything but immune to the outside influence of banks and Wall Street, the entities which it perceives as its constituents.
Whatever structure is created to control government investments in stocks, there will be groups who will advocate a set of criteria that should guide government buying and shareholder decisions. By way of illustration, some of these could include:
The government could not hold stock in any tobacco company, or in any cluster of corporations including tobacco companies.
The government could encourage every company in which it is a stockholder to release information of importance to other stakeholders: pollution releases; taxes paid to local and state governments and taxes avoided through exemptions, abatements, loopholes; average wages and wage range, etc.
The government could encourage every company in which it is an investor to pledge neutrality in union organizing drives.
The government could refuse to invest in any company that unreasonably delays and stonewalls injured victims in product liability lawsuits, or in any cluster of corporations that includes such stonewalling companies.
The government could encourage companies in which it invests to maintain a maximum 30-to-1 ratio in top-to-bottom salaries and wages.
The government could not invest in any company producing goods or contracting for the production of goods in sweatshops, whether in the United States or abroad, or in any cluster of corporations including such companies.
The government could not invest in companies profiting from doing business in countries ruled by dictatorships, or in any cluster of corporations including such companies.
The government could give preference in making investment decisions to companies that locate more of their manufacturing or value-added activity in the United States.
The government could work to ensure that decision-making authority in corporations in which it invests truly rests with shareholders.
The government could encourage companies in which it is a shareholder to voluntarily act to reduce greenhouse gas discharges, to increase energy efficiency and to switch from production and use of fossil fuels to renewable energies, including most importantly solar.
If the Congress directs part of the Social Security trust fund to be invested in the stock market — again, in our view, a big mistake — it would be irresponsible for the government to simply vote its share with management and buttress managerial prerogatives. The government is not like other investors — it has certain policies and principles which it seeks to promote as a matter of law, the Constitution and obligation to the people — and it would be intolerable for the government to support corporate practices that contradict broad public interest concerns with statutory bases .
One can readily see that federal government investment of the retirement fund in the stock market will breed many conflicts and consequences.
Preserving the “social” and the “security”
The various Social Security privatization schemes, full and partial, would cost both the “social” — that is the public, cooperative, societal — element of the program and “security” — the rock-solid income guarantee afforded by the system. It should be rejected.
President Clinton’s proposal to allocate some the budget surplus to the trust fund is a step forward in providing a guarantee to young citizens that they can count on Social Security being there when they retire, with benefit levels at least as generous as now exist. That positive step, however, can be achieved without veering off into the Clinton scheme of investing a substantial portion of the trust fund in the stock market.