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Why is it that when the stock market was hitting new highs just about every day, Washington rang with proposals to put Social Security money into the stock market?
And now with stocks in the tank, why has the idea vanished off the radar screen? If the idea is to buy low and sell high, why isn't now, in the middle of a bear market, an even better idea?
Reader Steve Foltz brought this up in an e-mail to Jubak's Journal a little more than a week ago. His specific question was a good one: Why isn't anyone talking about putting Social Security money into stocks now that they're down 40% from their October 2007 highs?
Thinking about that specific question, though, raised an even larger issue: If we're in the midst of the greatest financial crisis since the Depression, why aren't we doing more outside-the-box thinking about how to resolve the crisis?
In this column, I'm going to look at why investing Social Security money in the stock market now is actually a very good idea and then move on to some other outside-the-box ideas the new Obama administration should consider as it attempts to dig the country out of its current hole.
(Want to join in the fun? Add your ideas to my Market Talk message board.)
Create a sovereign wealth fund
The idea of investing Social Security money in the stock and bond markets has been kicking around for more than 10 years. The plan went something like this: The government will divert some percentage of the money coming in from Social Security taxes into individual accounts that would be invested in the financial markets.My plan would be similar, but I'm not looking for a long-term change in Social Security, so I don't envision setting up a new kind of individual account or permanently changing where the new money coming in from Social Security taxes goes. I'd like to take some of the money represented by the $2.2 trillion in special-issue Treasury bonds now credited to the Social Security Trust Fund -- let's say 20%, or about $400 billion -- and create a sovereign wealth fund for the purpose of investing the money to get a better return over the next few years than the 5.3% total return the trust fund earned in 2007.
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If a sovereign wealth fund is good enough for the likes of China, Dubai and other cash-rich nations, why not Social Security?
Let the fund invest the money over the next 18 months or so and then sell enough of its investments every year to take profits and gradually wind down the investment over, say, seven to 10 years.
The plunge in the value of many individual retirement nest eggs has made a comfortable retirement less attainable for millions of Americans. Making sure Social Security benefits won't be cut or delayed could keep many of those millions out of poverty in old age. And with the economy likely to grow more slowly after this crisis is over, because of the burdens that paying the bill for bailing out the financial system will impose, it's even more important that we don't increase Social Security taxes on those still working, if we can in any way help it.
A better use for debt
Are there reasonable objections to this plan? Sure.For one thing, the Social Security Trust Fund doesn't exist as a sequestered pot of money. It is instead invested in U.S. government debt. The government has spent the money raised by selling bonds to the trust fund. So raising the cash to invest in the stock market would require that the trust fund sell the bonds back to the Treasury. To pay for the purchase, the Treasury would have to sell new bonds to other investors, thus increasing the official U.S. debt.
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Fixing the global crisisOn Nov. 15, the leaders of the world's 20 biggest economies will start work on building a new global financial system. The global crisis is going to need a global fix, Jim Jubak says.
However, since we're perfectly willing to add $700 billion in debt to bail out the banks, why should adding $400 billion in debt to invest in the stock market in behalf of retirees turn this idea into a nonstarter? Taxpayers are much more likely to get their money back with a handsome return from a straightforward investment of Social Security money than they are from buying financial assets that can't be accurately valued.
Another issue often raised before the financial crisis was that having the government invest in the U.S. stock market would make the government a huge shareholder in private companies -- creating a covert form of socialism. But now that Wall Street's vocal defenders of the "free market" have become big supporters of a government bailout that trades billions in taxpayer money for government ownership of preferred stock and warrants, that argument seems, well, less convincing.
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