Government Investment vs. Government Regulation

[National Dialogue Moderator <moderator>]

    Clarifying "Government Investment" vs. Government Regulation 
	    of Workers' Investments--by Carolyn Weaver

Reviewing the general discussion, it appears that there may be some
confusion about the meaning of "centralized investment" or "government
investment," as endorsed by Bob Reischauer, that is creating
confusion in discussing government rules and regulations affecting
personal accounts.

To amplify, proposals for "centralized investment" would change
the way surplus social security funds are invested by the government.
Presently the government puts all surplus receipts into non-marketable,
special-issue government bonds.  (The surplus receipts, as several
have noted, are then available to finance the general operations
of the government.)  Bob Reischauer proposes that some of these
funds be invested instead in the stock market.  There are various
ways this could be done.  For example, a government-appointed board
could choose individual stocks and decide when to buy and sell.
I'm not aware of any serious interest in this approach.  Alternatively,
a government-appointed board could subcontract with a few financial
institutions to manage the investments, possibly by investing in
stock index funds.  This is what Bob recommends, and he and other
proponents of centralized investment frequently point to the Thrift
Saving plan for federal employees as a model.

Reference to the Thrift Saving Plan can be highly misleading, so
it is important to be aware of what proponents of centralized
investment do and do not find attractive about the system.  The
TSP is a 401(k)-type plan with individually-owned accounts.  It
also is voluntary.[1]  Workers who elect to participate can invest
in a few funds that are selected by the government and managed by
private institutions.  Bob Reischauer favors only the administrative
and fund-management aspects of the TSP, not its defining characteristics
from the standpoint of workers covered by it--individual investment
accounts that are owned by workers.

The essential point about centralized investment is that the stocks
that are purchased would not be owned by workers--either individually
or collectively--and investment earnings would not accrue to workers.
Investment earnings would be credited to the trust funds.  If the
trust funds were operating in the black, this additional income
would presumably be allocated in part to more special-issue bonds
and in part to reinvestment in stocks.  If the trust funds were
operating in the red, this additional income would presumably be
used to pay benefits.

The question of how the government might be involved with personal
accounts when workers are investing in stocks and bonds is completely
different.  For example, the government might impose restrictions
on what workers are allowed to invest in.  Or it might regulate
when and how workers can withdraw their funds.  Either way, workers
own their investments and any profits or losses.

How the government regulates personal accounts can be expected to
have a big impact on the choices made by workers and the financial
institutions that serve (or choose not to serve) them.  For example,
one sure way to kill workers' incentives to become informed and to
make prudent investment decision--or worse, to create incentives
to invest unwisely--would be for the government to create a new
retirement income guarantee that shielded workers from having to
bear any investment losses.

One participant raised the issue of investor education, suggesting
that this may be an area the government should be involved in with
a system of personal retirement accounts.  This is a reasonable
suggestion, assuming the accounts are mandatory and/or relatively
large.  (Under the leading bipartisan bills, accounts would be
funded with just 2% of earnings--2% compared to the full payroll
tax (employee and employer shares combined) of 12.4% for social
security plus 2.9% for medicare, for a total of 15.3%.)  A question
worth pondering, though, is what role we would or could realistically
expect the government to play.  It is not immediately obvious that
the government would provide better information--or the same
information at a lower cost--than financial institutions competing
to manage workers' accounts.

Those interested in the technicalities of the debate over centralized
investment--and the economic consequences of a change in investment
policy--should be aware that proponents of centralized investment
are not always clear about what the new investment policy would
apply to.  Would it apply to the investment of surplus funds--meaning
new surplus receipts--or to the investment of "reserve" funds--meaning
the government bonds currently credited to the trust funds on
account of past surpluses plus interest.  This has a bearing on
its economic and fiscal effects and relates to comments made by
Fed Chairman Alan Greenspan.

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[1] Personal accounts can be voluntary or mandatory.  Central
investment should be thought of as mandatory--either the system
does or does not invest a portion of funds in stocks, and, if it
does, everyone must bear the associated risks.

Carolyn Weaver