Wall Street’s Real Stake In Social Security Privatization

Steve Max, Midwest Academy 4/05

I have recently come to a different conclusion as to why the Wall Street brokerage companies are so strongly for private investment accounts or, it would appear, for any form of Social Security investment in stock. We have all been assuming that their main interest was the commissions they could earn from handling the accounts. There is more to it.

Lauren Townsend (CCJ, PA exec.), recently forwarded a speech by pension plan lawyer Alan Sandals declaring his candidacy for US Senate. [http://www.forourfuture.us/announcements/20050419_sandals_statement.php] Stressing Social Security, Sandals’ observation from the pension industry point of view was an eye opener. It is so obvious but missing from the popular discussion. Perhaps some of you have been following this more closely than I, but I am feeling a bit dumb for having missed it.

Sandals’ point rephrased: While we have all been focused on how the Social Security Trust Fund will be drawn down when the Baby Boomers retire, the managers of private pension plans have been anticipating that the same thing will happen to them. It isn’t just Social Security, every pension plan will start to be drawn down. Just as Social Security will need to redeem the bonds in the Trust Fund, private pension plans will have to sell off a large portion of their investments in order to meet benefit payments. It is anticipated that by 2024, private pension plans will become net sellers of stock instead of being the net buyers that they now are. The assets of private pension plans are currently $7.5 trillion, much of which will need to be sold in a relatively short period of time.

Not only is this true of pension plans says Sandals, but when the Boomers start to retire they will begin selling all kinds of retirement related assets. With savings spent, real estate sold, bonds cashed and 401(k)s liquidated, the markets will be flooded and the pension managers worry about where they will find buyers for all this stuff.

This where Social Security come in. The brokerage and pension industries are hoping that the federal government will help them transfer this mass of stock, of paper, from the older generation to the younger without it losing too much of its fictitious value in the process. Of course it is not just transferring the stock that must be accomplished, but transferring the risks of speculation that go with it. What better way to do this than through investment accounts or, for that matter, add on accounts or just having the SS system buy stock outright.

An added complication is that as the boomers move from their peak earning years to pension income, there will be a drop in their purchasing power. This can mean an economic slowdown just when a speed-up is needed.

If Sandals is right, it would appear that the high priests of Capitalism and prophets of the free market have realized that their much vaunted Law of Supply and Demand is leading them to a disaster. One that can only be averted by government intervention on a scale that would make Fidel Castro blush. Besides having an ironic twist to it, this has some interesting aspects.

It is not really possible to invest the Social Security surplus in stock because it has already been borrowed for other purposes, and would first have to be repaid by additional borrowing from elsewhere.* But suppose that the government really was prepared to increase the national debt by say five trillion dollars to buy stock. If it wasn’t a risk to Social Security how would we react?

The first impulse would be to say, “What, are you crazy?” But suppose the pensions of working people actually were at stake, something we don’t yet know. If they were, would we still be so fast to reject the idea? And, suppose that the government were to actually buy a vast quantity of stock, should it invest in companies that manufacture birth control devices and drugs, do stem cell research, publish Korans or print evolution text books? Should it invest in companies that outsource jobs, destroy the ozone layer, produce obesity causing fast food or have a record of unfair labor practices? If the government simply bought some of every stock with no exercise of judgment, how would it avoid buying the stock of terrorist owned companies that were created just to sell shares to the government? And, if it did exercise judgment who would exercise it and on what basis would it avoid investment in Enron? The possibilities are endless and quite funny.

Even more interesting is the possibility that some of us might consider the ownership of so much stock to entitle public representatives to seats on corporate boards. We might even insist that this be part of the deal. After all, if Wall Street is really on the ropes they would have to agree to anything. This suggests that the Democrats should under no circumstances allow the Bush Administration to “solve” the problem on its own terms. They can have much more fun solving it on theirs.

A different but related situation was flagged in the Detroit News (April 12th,) which noted that the Pension Benefit Guarantee Corp., an agency that backstops defaulting pension plans, is itself running a $23 billion deficit. The PBGC estimates that the auto industry alone has close to $50 billion in unfunded pension liabilities, and that is only the tip of a pension iceberg involving 34 million Americans in private plans. The article mentions that “Pension investments typically become underfunded because they are invested too heavily in the volatile stock market … .” Given the additional difficulties in many state pension plans, the number of people retiring with little more than Social Security is likely to be far larger than now expected.

*NY Times columnist Paul Krugman has referred to this as “belief in the perpetual money machine.” The government borrows at 3% to invest in stock at 7% thus solving all financial problems forever.