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Wall Street's Real Stake In Social
Security Privatization
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.
Many of us have been assuming that their main interest was the commissions
they could earn from handling the accounts. There is more to it.
In a recent speech declaring his candidacy for US Senate,
pension plan lawyer Alan Sandals made some eye opening observations from a
pension industry perspective.
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 comes 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 both
endless humorous.
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.
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