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Wall Street's Real Stake In Social Security
Privatization
Steve Max, Midwest Academy 04/22/05
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.
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