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Social Security Assets Are Best Left in the Hands of an All-Knowing Government
by William Shipman
Shipman is chairman of
Carriage Oaks Partners LLC and co-chairman of the Project on Social Security
Choice at the Cato Institute
Thank your lucky stars that
the advocates for Social Security reform have lost the battle. Their attempt to
tamper with the largest government program in the world would have subjected all
Americans to a risky scheme and the unbearable costs of two oddball ideas that
started to go out of style about 40 years ago: individual choice and personal
responsibility.
With reformers' misguided
efforts now behind us, proponents of the government's rightful role in shielding
us from risk should bask in their success. They have protected each of us from
ourselves.
Their victory, however,
doesn't mean that Social Security's financial challenges are over. It does mean
that we now know better how they will be met, and it gives us an opportunity to
explore how best to employ the government to meet additional challenges.
Starting around 2017, and
for the indefinite future, the payroll tax will be less than projected benefits.
This year only $90,000 of wages is subject to the payroll tax rate of 12.4%.
This means that an average-income family has all of its wages taxed, but the
rich family doesn't. The wealthy should have all of its wages taxed and
contribute more to society's needs.
Bad economics? No way; it
is part of our culture as evidenced by the income tax wherein we take more from
those according to their abilities and give more to those according to their
needs.
Taxing the rich more is
actually pretty clever because they don't need all of their income, though they
surely want it. This means that they'll work even harder if their taxes are
raised so they can continue to shop till they drop. For the greater good, the
government ought to mine this field.
These new revenues, plus
the near-term positive cash flow, should be invested in our capital markets to
garner the higher returns that the reformers rightly understood. However, the
owner of the assets should be the government.
This makes sense on several
levels. First, the government could spread the risk inherent in capital markets
across age and income groups. That is, when the market does well, the government
would pay retirees less and save the excess for a rainy day.
All retirees, therefore,
would get equal benefits no matter what the market did or what they paid in. And
the rich — well, they would pay more during their working years.
This would level the
playing field and promote equality of results by making the rich poorer. This
neat outcome can't be accomplished if individuals owned the assets, because some
people would retire when the market is in the doldrums and get less than those
who cashed out at a market top.
Different outcomes caused
solely by chance should be illegal. This may appear to run counter to state-run
lotteries, wherein by chance alone somebody wins a million bucks, but it isn't.
The state uses lottery revenues for higher causes, ones that individuals can't
appreciate and wouldn't support.
With the trillions in
assets that eventually would accumulate, the state could favor certain groups
for the benefit of social solidarity. For instance, if the fund's assets were to
exceed projected benefits, the government could allocate a small portion to
those who have special needs. Politicians in Washington are in the best position
to know who these people are and, therefore, they, not we, should make these
choices.
With the owning of stocks
and bonds in American companies, the government finally would be able to sit in
the corporate driver's seat. We have all heard of the Enrons, selfish CEOs and
how managements have failed. Only the power of the government, with its
enlightened understanding of what is best for society, would be able to put an
end to all of this.
Those of us who would still
own some stocks and bonds would thus get better protection against loss from
poor corporate governance.
Also, the government could
direct management strategy. It is virtually impossible for the management of a
corporation, even a large one, to have access to all information within the
government. It makes perfect sense to leverage this trove of knowledge by
requiring management to follow government dictates. This would benefit all stock
holders and society as well.
With the government owning
vast amounts of corporate America, it would be a formidable negotiator. For
instance, it would get the lowest fees for asset management, custody and the
recordkeeping necessary to pay the appropriate amount to each retiree. Imagine
what these fees would be if individuals controlled and had personal property
rights over their assets.
Although its fees would be
lower, the financial services industry would benefit in other ways. For
instance, it would need to target fewer prospects because most of the assets
would eventually be controlled out of Washington. Marketing, distribution and
travel costs would tumble.
Also, the government may be
interested in strictly limited investment strategies such as indexed funds.
Investment firms could therefore dramatically reduce portfolio management
overhead.
One of the selling points
for Social Security reform with individual accounts and personal property rights
was that individuals could bequeath some of their accumulated wealth to their
loved ones. This can be accomplished more efficiently through government
ownership and control.
There is no need, nor is it
fair or appropriate, for a wealthy individual to bequeath assets to his loved
ones — who in their own right are probably well off.
The government, which has
information on everybody's income and wealth, could better allocate any excesses
to those who it determines should receive them. This would really take the sting
out of the rich begetting the rich.
With the Social Security
reformers' defeat, society dodged a howitzer. We can now move more aggressively
toward after-tax income equality, equal retirement benefits for all, a narrowing
of the gap between rich and poor and, most important, an expanded role for
compassionate government so that each of us is protected from risk, ourselves
and the dire consequences of individual choice and personal responsibility.
Why didn't I think of this?
This article appeared in
Investor's
Business Daily on November 18, 2005.
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