SS reform, politics and conflicts -- Colin O'Brien

[National Dialogue Moderator <moderator>]

Thank you for your question, Colin.

I think the answer to your question on collective government 
investment in private equities and the potential for political 
influence can be summed up in the words of The Honorable Daniel 
Patrick Moynihan (D-NY), one of Social Security's foremost experts and 
defenders (and who, also, has endorsed a personal account reform 
approach).  Last year in an interview Senator Moynihan said in effect, 
"We [politicians] can't be trusted with that -- don't give us that 
temptation."

Furthermore, Federal Reserve Chairman Alan Greenspan has also endorsed 
this view against government ownership and control of private 
equities.  In a Senate Budget Committee hearing last year Mr. 
Greenspan remarked:  

"... I think [government ownership of private equities] is very 
dangerous. ... I know there are those who believe it can be insulated 
from the political process, ... I have been around long enough to 
realize that that is just not credible and not possible.  Somewhere 
along the line, that breach will be broken."

I would think I speak for most advocates of Social Security reform with 
personal accounts that we are united in our opposition to collective 
government control and ownership of private U.S. companies. 
It is interesting to note, however, that this is not a Republican or 
Democratic issue, either.  Earlier this year the U.S. Senate passed a 
resolution opposing government investment in private financial markets 
by a margin of 99-0.  That's about as strong a bipartisan vote against 
government investment that you can get.

I do not believe that effective firewalls could prevent politics from 
entering into investment decisions by the government.  Would the 
defenders of government investment explain whether or not they would 
allow government investment in tobacco stocks?  In non-union 
companies?  In companies that do not offer health insurance?  In 
companies that make guns?  The list is boundless.

Furthermore, how would government go about reconciling its current 
role as regulator of business in the interest of public welfare and 
its new one of fiduciary trying to garner the highest return to Social 
Security program participants?  Simply put, it could not.  There would 
be a severe conflict of interest if, for example, the government were 
to be investing Social Security funds in the Microsoft Corporation 
while simultaneously investigating the company for antitrust 
violations.

One last point on government investment bears mentioning, though
I believe that this was raised earlier by Senator Gregg and
Congressman Kolbe.  It should be noted that when Social Security
taxes were first collected in 1937, the system's administrative
costs were 10 times what they are today.  That is to be expected
at the beginning of a new administrative structure.  But the costs
came down over time.  Also, much of Social Security's administrative
costs are born by employers and are not easily apparent to the
public.  Social Security uses public (i.e., non-taxed) buildings
and land.  The government uses competitive bidding to install
computer systems, enjoys subsidized mail and telephone services,
and depreciation and fringe benefits do not affect Social Security's
annual budget.  These are not "free" services -- the taxpayers pay
for them even though it is not readily apparent.

Although moderately higher costs are associated with a partially 
funded Social Security system with personal accounts, they can be 
ascribed to the additional services that are provided:  Not only do 
these costs cover collection and distribution of funds -- which 
current Social Security does -- they also pay for the investment 
services of government-approved money managers to invest and grow 
savings.  Most workers are willing to pay a portion of their 
earnings to money managers who provide them with higher returns.  If 
this trade-off were not worthwhile, America's investment industry 
would not exist.

With economies of scale, most experts predict administrative costs 
under a mature partially funded Social Security system with personal 
accounts to be less than 1 percent.  To be evaluated fairly, the two 
systems should be compared in terms of maximizing net returns after 
administrative costs, not minimizing administrative costs 
themselves.  Seen in this proper light, strengthening Social 
Security through advanced-funding with personal accounts is 
preferable to both government investment and the status quo.

Again, thank you for your question.

Senator Rick Santorum