Nader: Regarding Privatization of Social Security
votenader.com
Statement of Ralph Nader
At the "Saving Social Security From the Privatization
Threat" Conference Rayburn House Office Building
January 21, 1999
Every discussion of Social Security should begin by recognizing
that Social Security is a system of social insurance. It places
government in one of its noblest roles: Provision of a bedrock
guarantee to all members of society that you do not need to fear
the financial consequences of growing old or disabled, for
society will assure you with an income stream to enable you to
meet your basic needs.
It is government of, by and for the people. It is government as it
should work -- a coming together of society to ensure that we,
as a community, > take care of each other as we age or suffer
from disabilities.
This is the opposite of government in its all-too-familiar function
as provider of corporate welfare, where narrow business
interests hijack government programs or agencies and convert
taxpayer assets into private profits, with no or inadequate
reciprocal benefits to the public.
Through the invention of social security, we have created a
commonwealth. It is not just the intergenerational transfer of
monies, but the affirmative creation of a security guarantee for
every citizen.
These remarks focus on particular dimensions of Social Security
privatization: the loss of retirement security and the consequent
increase in social anxiety, along with the implications of investing
some of the trust fund in the stock market. Other speakers have
or will discuss other critical issues, including privatization
proponents' cooking of the books to create a false sense of
crisis with Social Security, the comparative rates of return from
Social Security and stocks, and how privatization would
disproportionately harm the poor and minorities.
From Systemic Tranquility to Enforced Anxiety
From the consumer or citizen perspective, one of the great
benefits of social security is its very certainty. As one of its great
assets, it offers systemic tranquility -- no matter what, people
know that in old age or disability, they can count on the social
security guarantee.
As soon as the system is privatized in individual accounts, in
whole or significant measure, the commonwealth would be
perverted into a subsidy bonanza for brokers, who would take
their 2-to-5 percent cut on account maintenance and
transactions, and for insurance companies who would skim their
20 percent in administrative fees, and systemic tranquility would
be replaced by an enforced anxiety.
By their very nature, market investments introduce risk
into the equation.
There is nothing inherently wrong with risk, of course. Risk and
the returns on risky investments are an important motor in our
economy.
However, most working people already confront sufficient risk
-- it is embedded in the increasingly unlikely prospect of
maintaining a good, well-paying job for a lifetime and the
uncertainty that is pervasive in the churning of the globalized
casino economy. If people believe there is an upside to risk and
are eager to invest in the stock market, in bonds, in hedge funds
or otherwise, they are free to do so, directly or through IRAs,
401Ks and other tax-subsidized private retirement devices.
But where there is a role for risk, there is also a place for
reliability and confidence in a foundational support system.
Where people could rely on the protection of social security, in
a privatized system they would ride the Wall Street roller
coaster.
They would have to worry about sudden plunges in the market,
or companies in which they had invested taking a dive, or the
consequences of being taken by hucksters.
Indeed, these fears would be well founded:
What would happen if the market crashed, and people suddenly
saw the source of 30 percent of their retirement income stream
wiped away?
What happens to the individual who bets his retirement nest egg
on the success of eight-track tapes, or beta videotaping
systems?
What should the government do if it permits unregulated private
individual investment, only to find that some significant portion of
the populace loses its entire retirement investment account due
to unlucky or misguided investments?
What happens to the old person who is ripped off through
investment fraud?
There are only two possible scenarios, both completely
unacceptable. The first option is for the government to maintain
its commitment to providing a secure retirement income to all of
the nation's citizens, and to restore those who suffer from such ill
fortune to the position they would have been in, absent the
privatization scheme. This "reinsurance" would have the benefit
of maintaining the social safety net, but it would also create an
incentive for people to undertake unreasonably wild gambles
with high potential payoffs -- the economists' moral hazard.
Where the first alternative is foolish, the second is cruel: Let the
unlucky suffer. Abandon the notion of "security," and the
bedrock guarantee afforded by the current system.
The certainty of fraud
We know with 100 percent certainty that, if social security is
privatized, there will be an explosion in the already startlingly
high incidence of investment fraud, committed both by snake-oil
hucksters and their more serene counterparts in respected and
household-name brokerages.
To take a current example, earlier this month, the Securities and
Exchange Commission (SEC) brought administrative actions
against 28 broker-dealers, including such well-known firms as
Bear Stearns, CS First Boston, Dean Witter Reynolds, J.P.
Morgan Securities, Legg Mason, Lehman Brothers, Merrill
Lynch, Morgan Stanley, CIBC Oppenheimer, PaineWebber,
Prudential Securities and Salomon Smith Barney. The firms and
various individuals agreed to pay more than $26 million in civil
fines.
The types of improper conduct found by the SEC included:
market manipulation through coordinated entry of bids;
undisclosed coordination of quotations; the intentional delaying
of trade reports; failure to keep accurate records and books.
These practices harmed both customers and market
participants, according to the SEC. In some cases, for example,
the broker-dealers failed to fulfill their obligation for best
execution of customer orders, in order to enhance the profits
from executing the orders.
The brokers are not the only brandname financial companies to
have been caught engaging in fraud recently. In the insurance
industry, for example, in the last two years Prudential settled a
class action suit alleging illegal churning and twisting for as much
as $2 billion, and American General and State Farm settled
similar suits for hundreds of millions of dollars.
Paralleling the improper, illegal and fraudulent activities of these
major names is widespread illegality and criminality by
thousands of others who haunt the financial world. Even with its
inadequate budget, the SEC enforcement record books are fat
with consent decrees, civil fines and criminal prosecutions. In
1998 alone, the SEC entered into nearly 400 consent decrees
to settle civil and criminal litigation and took administrative
action in hundreds more instances against accountants, brokers
and investment firms.
Many of these cases involve pure investment scams of the sort
to which the poor and the elderly -- those most reliant on the
guarantees of social security -- are most vulnerable. According
to the SEC, these scams include high-pressure sales through
cold calls from "boiler room" operations, glittering
telecommunications technology venture deals that are totally
fictitious, "prime" bank financial instruments that often involve
Ponzi schemes, and the burgeoning business of Internet
investment fraud including such techniques as "pump and dump"
scams, pyramids, risk-free frauds, off-shore frauds, online
investment newsletters that "scalp" stocks they promote and
e-mail spam.
"It is likely that giving people the ability to select investment
options will provide the unscrupulous with new opportunities to
deceive and distort," noted SEC Chair Arthur Levitt in a recent
address. Levitt points to the UK experience where social
security privatization led to "abusive practices, [which] coupled
with inadequate regulation, led to billions of dollars in losses for
investors."
Sentencing the losers
Even if we leave aside the inevitably high incidence of fraud,
even if we accept for the sake of argument the misleading claim
that market swoons can be ignored because over time the
market will inevitably rise, and even if we agree for the purpose
of this discussion with the deceptive/groundless assertion that
the market will show a higher return over time than social
security, we are still left with this:
The seven percent annual return which privatization proponents
attribute to the market is an average -- spread not just
horizontally over time, but vertically among the population.
In the course of debate, there is a tendency for a dangerous
Lake Wobegon effect to distort clear thinking about this:
Everyone assumes they will do better than the average, or at
least as well.
But of course there will be many losers, not just winners.
So again, privatization presents us with the irresolvable dilemma:
Does the government encourage "moral hazard" by bailing out
the losers? Or does it simply let citizens gamble away their
retirement security?
To escape the dilemma, the President and others have
suggested, in one form or another, that citizens be given the right
to set up individual social security accounts on top of their
existing right to benefits. Some argue that if such a proposal
were truly in addition to and distinct from the existing system, it
would be an improvement, for it would preserve the bedrock
social security guarantee.
However, these proposals raise the issue of why additional
government resources should go to this purpose, rather than to a
straight increase in social security benefits, or to close a
legitimate Medicare funding gap. These questions would be
especially poignant given that a disproportionately large amount
of small investment funds is likely to be siphoned off in brokers'
and insurance administrative fees and costs.
Most worrisome in the President's proposal to create Universal
Savings Accounts (USA) is the specter that over time, and
perhaps just over the upcoming legislative session, these savings
accounts will cease being "in addition to" existing social security
payments, and will begin to displace them -- thus taking us back
to the already noted problems with a privatized system of
individual Social Security accounts.
The President's USA accounts also share a basic problem with
all of the proposals to create personal retirement accounts: they
encourage people to identify their interests with Wall Street,
even though Wall Street does little to spur productive, empirical
investment and even though Wall Street interests frequently
contravene citizen interests in clean air and water, low prices
and quality goods, good, well-paying jobs, maintaining
production in the United States, workplace safety, fair
recompense to victims of defective products, vigorous antitrust
enforcement, campaign finance reform, low unemployment and
on and on.
The specter of the corporate state
In his State of the Union speech, the President reintroduced a
notion that seemed in recent months to disappear from the social
security debate: the direct government investment of portions of
the social security trust fund in the stock market.
Under the President's proposal, at the end of 15 years, the
government will have invested on the order of $700 billion in
stocks. That will give the government ownership of 4 to 5
percent of the entire stock market.
The motivation for the proposal is to attain the allegedly higher
average rate of return from the stock market. There are reasons
to question the underlying assumption of high returns. As prior
panelists have discussed, projected higher rates of return for the
stock market are premised on an economy which is growing fast
enough to eliminate the supposed 35-year social security
shortfall -- the very thing which underlies the entire effort to
"save" social security.
But leaving aside arguments about return on investment,
government investment in the market would constitute arguably
the greatest corporate welfare subsidy in American history -- no
small feat. It would move the United States further in the
direction of becoming a corporate state.
The infusion of hundreds of billions of dollars of the trust fund
into Wall Street would further balloon the stock market. The
most direct beneficiaries of the investment would be all existing
investors: the rules of supply and demand, other things being
equal, would push up the value of their stock, without their
having done anything (except perhaps lobby for this proposal)
and without any change in the underlying value of the companies
in which they are invested. In a market that already shows ever
more worrisome signs of "irrational exuberance," inflating the
bubble even further would be foolish, to say the least.
The market is already very liquidity-driven. Investing substantial
portions of the trust fund would make it worse.
When a company in which the government holds a significant
share faces bankruptcy or crisis, how will the executive or
Congress resist the temptation to bail it out? Indeed, it might
even be imprudent not to bail it out. Thus the federal
government will be converted into a de facto insurer or
guarantor of most large businesses.
Still more troubling is the prospect of government intervention to
buttress a collapsing market. Would the President and Congress
sit and watch as $700 billion in government investments shrunk
to $400 billion? That's hard to imagine. Again, public action to
stave off harm to the Social Security trust fund will primarily
benefit private investors, who would ride on the back of the
government to escape from troubled waters -- without paying
any rescue fees. That's more free, de facto investor insurance.
Such action would also raise risk-taking to new speculative
highs due to the assumption of a government bailout in the event
of failure.
Finally, the government taking such a large stake in the stock
market could force Congress to legislate with even more of an
eye to serving Wall Street than is now the case. This would
structurally bias the Congress and the Executive to favor a host
of anti-consumer, anti-worker and anti-environmental policies:
tort deform, suppression of the minimum wage, no meaningful
restrictions on greenhouse gas emissions, etc.
There's more: We've become strangely adjusted to newspaper
headlines such as "Unemployment Rates Rise, Wall Street
Applauds." With a huge investment in Wall Street, the
government itself will be structurally biased in favor of this
perspective. Large-scale investment will work to lock-in fiscal
conservatism and a bias toward spending favored by Wall
Street (in defense, say, rather than safe drinking water).
Immediately following the President's State of the Union speech,
for example, one analyst warned in the Washington Post against
any change in the national economic policy of fiscal and
monetary policy that would undermine the bullish era for stocks.
That's not what should be central to economic policymaking.
We plainly believe that trust fund investment in the stock market
is a very bad idea. (This is, incidentally, qualitatively different
than state and local pension fund and other investment in the
market: those funds are diffused among hundreds of such
investors, are not invested by entities or levels of government
with the ability to bail out corporations or set national economic
policy, and are not invested by funds with the broad and
multiple functions of Social Security, including social insurance,
disability insurance and insurance for children.) Should Congress
and the President erroneously proceed with such a plan, with its
accompanying boost to stock value, the government must at
least exercise the generic rights which attach to stock ownership:
the right to vote shares and influence company policy
commensurate with ownership stake.
The notion that the investment portfolio should be managed by a
"neutral" body and immune to outside political influence --
modeled on the Federal Reserve, no less! -- invites ridicule and
should be rejected out of hand. The Fed model is instructive: the
central bank is indeed immune to influence from citizen groups
that would like to see the Fed adopt a less restrictive monetary
policy, enforce consumer protection laws or support community
reinvestment initiatives and promote better access to credit for
poor and minority citizens and small businesses. But the Fed has
been anything but immune to the outside influence of banks and
Wall Street, the entities which it perceives as its constituents.
Whatever structure is created to control government investments
in stocks, there will be groups who will advocate a set of criteria
that should guide government buying and shareholder decisions.
By way of illustration, some of these could include:
The government could not hold stock in any tobacco
company, or in any cluster of corporations including
tobacco companies.
The government could encourage every company in
which it is a stockholder to release information of
importance to other stakeholders: pollution releases;
taxes paid to local and state governments and taxes
avoided through exemptions, abatements, loopholes;
average wages and wage range, etc.
The government could encourage every company in
which it is an investor to pledge neutrality in union
organizing drives.
The government could refuse to invest in any company
that unreasonably delays and stonewalls injured victims in
product liability lawsuits, or in any cluster of corporations
that includes such stonewalling companies.
The government could encourage companies in which it
invests to maintain a maximum 30-to-1 ratio in
top-to-bottom salaries and wages.
The government could not invest in any company
producing goods or contracting for the production of
goods in sweatshops, whether in the United States or
abroad, or in any cluster of corporations including such
companies.
The government could not invest in companies profiting
from doing business in countries ruled by dictatorships, or
in any cluster of corporations including such companies.
The government could give preference in making
investment decisions to companies that locate more of
their manufacturing or value-added activity in the United
States.
The government could work to ensure that
decision-making authority in corporations in which it
invests truly rests with shareholders.
The government could encourage companies in which it is
a shareholder to voluntarily act to reduce greenhouse gas
discharges, to increase energy efficiency and to switch
from production and use of fossil fuels to renewable
energies, including most importantly solar.
If the Congress directs part of the Social Security trust fund to
be invested in the stock market -- again, in our view, a big
mistake -- it would be irresponsible for the government to
simply vote its share with management and buttress managerial
prerogatives. The government is not like other investors -- it has
certain policies and principles which it seeks to promote as a
matter of law, the Constitution and obligation to the people --
and it would be intolerable for the government to support
corporate practices that contradict broad public interest
concerns with statutory bases .
One can readily see that federal government investment of the
retirement fund in the stock market will breed many conflicts
and consequences.
Preserving the "social" and the "security"
The various Social Security privatization schemes, full and
partial, would cost both the "social" -- that is the public,
cooperative, societal -- element of the program and "security" --
the rock-solid income guarantee afforded by the system. It
should be rejected.
President Clinton's proposal to allocate some the budget surplus
to the trust fund is a step forward in providing a guarantee to
young citizens that they can count on Social Security being there
when they retire, with benefit levels at least as generous as now
exist. That positive step, however, can be achieved without
veering off into the Clinton scheme of investing a substantial
portion of the trust fund in the stock market.
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