September 22, 2005 | WebMemo on Social Security
With a slight change, Sen. George Voinovich (R-OH) is repeating one of former President William Clinton's most famous mistakes. In early 1999, Clinton called for the government to invest part of the Social Security trust fund in stocks and bonds as a way to increase the amount that would be available to pay baby boomers' Social Security benefits. Within a day, support for the idea dropped to near zero after Federal Reserve Chairman Alan Greenspan pointed out that it would be almost impossible to insulate the trust fund's investment decisions from political interference. Most people recognized that giving federal bureaucrats the power to invest huge amounts of money in the stock market would create a fundamental conflict of interest between the long-term needs of future retirees and short-term political goals.
Now Sen. Voinovich wants to create a Treasury agency to invest Social Security's cash surpluses in various types of bonds. Under his plan, this agency would invest Social Security money in state and local bonds, mortgage-backed securities, and possibly even corporate bonds. Unlike with Clinton's 1999 plan, the agency would be prohibited from investing in stocks. It would also be forbidden to buy federal government debt. Despite these changes, Voinovich's plan is just as flawed as Clinton's was.
The Voinovich plan would allow the federal government to invest money from Social Security in bonds that fund state and local building projects, ranging from highways to public housing. The net result of Voinovich's idea would be to provide billions of dollars for politically-motivated public works projects. In addition, it would encourage the government to purchase mortgage-backed securities just as the fevered housing market is coming back down to earth.
To make matters worse, political influence would almost certainly dictate which bond issues were purchased, despite supposedly strict investment standards. State pension funds have a terrible record of investing for political purposes, in the process losing millions of dollars that should have been available to pay pensions to state and local workers. While Voinovich would oppose such political use of Social Security funds, there is no way to insulate the investment component of his plan from cronyism and political manipulation. The Social Security surpluses that would be invested under his plan would not be large enough to buy all investment-grade state and local bond issues, and the agency would thus have to choose which to buy and which not to buy. Political pressure is certain to be brought to bear, and even if this Administration is able to resist the temptation, the next one may not be able to.
Voinovich is right that Social Security's surpluses hide the real size of federal deficits. He is also right that Congress should not continue to use Social Security's surpluses to pay for other government programs. However, he has the wrong solution.
Social Security's surpluses should not be spent on pork projects or other government programs. They should also not be invested by politicians or bureaucrats. Instead, they should be returned to individual workers so that they can invest them for their retirement in safe, controlled investments that they would own, secure in the knowledge that their retirement savings have not been wasted by politicians on some pork project. Instead of Voinovich's plan, Congress should consider legislation that allows workers to invest their shares of Social Security's surpluses in individual accounts that they would own and control. Sen. Jim DeMint and Rep. Jim McCrery have introduced legislation that would do this. That way, Congress would be forced to stop using Social Security's surplus to hide the real size of the deficit and politicians would not be able to use that money for politically-inspired investments.
David C. John is Research Fellow in Social Security and Financial Institutions in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
 See Daniel J Mitchell, "Government-Controlled Investment: The Wrong Answer to the Wrong Question,"
Heritage Foundation Backgrounder No. 1841, April 11, 2005, at http://www.heritage.org/Research/SocialSecurity/bg1841.cfm.