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Tuesday, December 21, 2004

Social Security Newspeak

Talk of “privatizing” Social Security is a modern application of George Orwell’s “newspeak,” where words (in his novel, 1984) conveyed their opposite meanings.

The idea is simple, and will temporarily mask the real problems in the system.

Some in D.C. purport to have the ideas and ability to keep Social Security from going broke, which is now scheduled to happen about the time baby boomers start retiring.

The idea is that funds collected for Social Security should be invested in the equity market. Some of our rulers call for a degree of individually-directed investment; others look to a new agency to provide investment direction. What they all advocate is our mandated investment in the stock market.

The amount of money is significant, possibly 10% of the value of the publicly-traded equities. Ignoring the Constitutional problems surrounding such a plan (and those of Social Security itself), there are several practical dangers here.

Stock prices are again rebounding and are historically high, whether measured by their price/earnings or -/dividends ratios, return on assets, or any other reasonable (though superficial) analysis.

Congress sees future problems for re-electability. Today’s indices are unlikely to climb forever, particularly as foreign investment slows. A new supply of money will be needed to have stock prices continue to rise, or even hold steady at these inflated levels. That’s how the idea of putting Social Security money into the market became so appealing to those fat cats and speculators who are already heavily invested (and who run the country).

Think of what Congress could say to us little people: “We’re giving you a piece of this great expanding pie. Your Social Security fund will now appreciate faster than ever before. The companies where you work will be adequately capitalized, giving you job security. Stockholders will use their earnings to buy your products, leading to more prosperity for all.”

What such a scheme would really be doing is something different. First, by introducing so much more money into competition for buying a limited supply of stocks, it would raise or support stock prices at high levels for a while, subsidizing the bailout of over-invested big shots. Second, whoever approved the investments for us little people would have heavy influence on Wall Street, because of the size of the “portfolio” he managed.

Firms and lobbyists would divert their efforts away from productivity, and towards influencing the governmental overseers, because the stocks the Social Security fund would buy (or would allow us to buy) would necessarily outperform others in the industry, a windfall for those investors on the inside track. By extension, the fund manager could greatly influence the decisions of the boards of their portfolio or target companies, or even those companies’ competitors. Even the largest companies’ boards would show little resistance to the wishes of the SSA fund manager.

Even better for short-thinking politicians, the influx of social security money will buoy stock prices for a while; but after those initial investments have been made, the best we could hope for would be moderate gains, which would again be based on productivity gains (rather than lots of new Social Security dollars’ chasing relatively few investments)… and that’s if we don’t have a repeat of what happened to the market in 2000.

When Social Security needs to start making withdrawals to pay the Boomers, this will trigger a radical, long-term sell-off, which will constantly bleed profits from the entire market. Timing and targeting SSA stock sales could become a gigantic political football game. Power would naturally consolidate in Washington. There, would-be demigods will play a high-risk game with other peoples’ retirements.

Sociologically, the outright ownership of so much stock by government, and therefore control of so many shares by bureaucrats, would have predictable effects. Yet powermongers, greedy professionals, and myopic amateurs still somehow want to introduce a high degree of state control (if not outright ownership) into one of the most-free areas of our economic society, the stock market.

Earlier, I said the government is involved in “newspeak,” calling something its opposite, to keep the aware members of the public confused, and the rest, contented. They call their baby, “privatizing the Social Security system,” while more accurately they’re setting out to control the stock market. Will we be fooled? Will we allow it? Will we deserve it? Will the economy survive it?

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