Many objections are being raised to the partial privatization of the Social Security system, but our greatest concern about the idea — which we generally support — seldom is mentioned. Frankly, we worry less about the harm partial privatization could do to Social Security beneficiaries than the damage it might do to freely functioning stock, bond and security markets (and, by extension, the economy).
When contemplating this or any other policy change, it’s always useful to consider the law of unintended consequences — to peer into the future and try to anticipate, based on prior experience, where such proposals are prone to go awry. Doing this, the president’s proposal (it hasn’t been fleshed out enough to constitute a “plan”) raises a few red flags.
Some advocates of partial privatization predict that the resulting surge of investing would serve as an economic shot in the arm, and they might be right. But at what potential harm to the stock market? We doubt politicians and federal regulators will allow Social Security beneficiaries to invest in the customary sense of the word — to figure the odds, roll the dice and live with the consequences. And that’s where we anticipate trouble.
Our greatest fear is that investing a portion of one’s retirement in stocks and securities, even relatively “safe” ones, will increase the temptation of the federal government to meddle in, and perhaps even manipulate, the market. More specifically, the temptation will be great to intervene in ways that mitigate the inherent risks and ensure positive outcomes, lest the retirement accounts of so many Americans evaporate due to a sudden and steep market downturn.
Some level of risk can’t be removed from investing, any more than capitalism can ensure that every company turns a profit. In the market, financial rewards come to those who best calculate the risks or have good luck. The “safety” of certain investments is a relative term.
With so many retirement accounts potentially at risk, the temptation will be great to rig the game to ensure certain outcomes. This would be reassuring to those holding partially privatized retirement accounts; but it would likely have a distorting effect on investing and the economy.
The government’s attempt to mitigate risk would likely take three forms.
First, politicians would seek to strictly prescribe what types of investments are permitted, and who would do the investing. That could not only lead to gaming of the system by favored investment companies — potentially inviting even more federal intervention — but skew or distort the investment markets in unanticipated ways.
Second, the government would be tempted to put the brakes on any market “correction” that threatened to wipe out these investments, even if that correction was needed. And if it’s going to intervene to safeguard one group of investors, why not all of them? Can you really have a “free” market in which everyone is guaranteed positive outcomes as a result of government intervention?
Third, political pressure might also eventually grow to bailout those beneficiaries whose investments come up short of expectations — erasing any potential savings from partial privatization and perhaps even increasing program costs.
None of these concerns is reason enough to reject the idea of partially privatizing Social Security retirement accounts. All can potentially be dealt with in any plan that emerges. They’re merely offered as reminders that effects of such a change would be felt by more than just program beneficiaries, and that we ignore or discount the law of unintended consequences at our future peril.