February 3, 1999

February 3, 1999 | News Releases on Social Security

Government Investing of Social Security Funds Fraught With Peril

WASHINGTON, FEB. 3, 1999-Giving politicians the power to invest Social Security funds in the stock market as President Clinton recently proposed is "a recipe for disaster" that would endanger retirement income by inviting politically tainted decisions, says a new paper by The Heritage Foundation.

Government officials would likely use their power as the single largest shareholder in the U.S. economy to adjust the market in favor of well-connected interest groups or corporate contributors, writes Daniel J. Mitchell, Heritage's McKenna senior fellow in political economy.

"When politicians control business decisions, political incentives become more important than economic ones," he writes. This "risky and dangerous experiment" would give the federal government an unprecedented amount of financial leverage, allowing it to pursue broad social and political goals by manipulating the market almost at will.

Mitchell provides numerous examples of how state governments have mishandled employee pension funds. The Texas State Board of Education unloaded 1.2 million shares of Disney to protest films made by a subsidiary, while Minnesota lost $2 million of workers' money by dumping tobacco stocks. Other states have used workers' money to balance their budgets.

Many states prescribe a variety of social goals for their pension funds, regardless of the effect on investment returns, Mitchell notes. Some declare particular industries off-limits, such as tobacco, alcohol and defense, while others promote politically motivated projects, such as low-income housing or local development.

The most sensible way to protect retirement income, Mitchell concludes, is to allow American workers to give a portion of their Social Security payroll taxes to financial experts of their own choosing. Unlike politicians, these experts have the knowledge to invest wisely and are legally obligated to act in the best financial interests of their clients.

In a related Heritage paper also released today, analyst David John outlines the problems with another of the president's Social Security proposals: creating a new type of retirement savings account. For one, John says, the president recommends funding these accounts with future budget surpluses, but the Congressional Budget Office has warned that the surpluses will not continue indefinitely. More important, these accounts do nothing to address the underlying flaws of the Social Security system, he says.

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