Those Were the Days

I just heard Louisiana Sen. Bill Cassidy outline his plan to “rescue” Social Security on Face the Nation. Here’s the relevant snippet:

SEN. CASSIDY: Yes, but I have a plan, and we don’t raise the retirement age in my plan. But that said–

MARGARET BRENNAN: This is the sovereign wealth fund–

SEN. CASSIDY: –somebody else may have a plan that does it- what’s that?

MARGARET BRENNAN: This is the sovereign wealth fund plan you had with Senator Kaine?

SEN. CASSIDY: This is the one where you do a investment fund and you put $1.5 trillion in it and you allow it to grow with the economy. It’s what the Canadians do, the Norwegians do, the Japanese do. It’s what the U.S. government does with the Federal railroad retirement system. When you do that, the growth in the economy takes care of a lot of the problem with the debt.

IMO that would have been a fine idea in the 1980s when Congress reformed Social Security by raising FICA and the retirement age but it has several serious problems now.

The first is where do you get the $1.5 trillion? Not only do Social Security expenditures exceed receipts but general spending is running at a deficit. We could:

• borrow another $1.5 trillion which would increase pressure to monetize the debt and thereby contribute to inflation and reduced affordability
• raise taxes which Sen. Cassidy opposes
• reduce or reallocate other federal spending

all of which are difficult or impossible in the present political climate.

The second is that such a fund would inevitably be politicized unless clear lines are drawn. The federal government should not be picking winners and losers. Congress would inevitably face pressure to favor politically desirable industries, avoid investments in unpopular sectors, or use shareholder voting power to pursue policy goals.

The third is that a large government purchase of equities would initially transfer wealth to existing shareholders by bidding up asset prices. According to the Federal Reserve the top .1% of wealth owners own 30% to 35% of of equities and mutual fund shares. That the richest are not rich enough is not presently a major problem in the United States.

The conceptual problem is do you really want the federal government to own a large portion of the economy? It’s unclear to me how one can philosophically oppose socialism and support government ownership of the economy. Even if one rejects the label “socialism”, a government investment fund of this scale raises legitimate questions about the appropriate role of the federal government as a major shareholder in private enterprise.

First restore actuarial balance through taxes and benefits; only after the program again generates surpluses should those surpluses be invested. My alternative plan would be to raise the Social Security retirement age to 70, raise the maximum income subject to FICA so that 99% of wage income is subject to it (that’s about $560,000 at present) indexed to inflation, invest some portion of Social Security surpluses up to 100% in one or more privately administered mutual funds, and cap the administrators’ earnings for the fund.