Let's suppose Congress approves President Bush's "personal accounts" for Social Security. The Social Security system would then become the largest single investor in U.S. stocks. By 2050 Social Security could hold 25 percent of all stocks, estimate economists at Goldman Sachs. This estimate reflects a modest plan for personal accounts; other proposals would permit bigger stock purchases. Hardly anyone has thought about the economic consequences of concentrating so much stock in the Social Security system. My hunch is that it would turn out to be a huge mistake -- or worse.
The idea of personal accounts is that Wall Street should triumph over the welfare state. Just the opposite might occur: The welfare state would triumph over Wall Street. The money flowing into personal accounts would not be invested according to the "free market." Individuals wouldn't have the freedom to invest in Microsoft, General Electric or eBay. Instead, it would be invested according to rules made by Congress, influenced by politics. There would be unrelenting pressure from interest groups, "experts" and public opinion.
The danger is that investment decisions would become unduly politicized and that the economy would consequently suffer. The rules governing which stocks could or couldn't be purchased for personal accounts might become irrational or counterproductive. The reason is that what personal accounts aim to accomplish is inherently difficult, perhaps impossible. The economic and social roles of Wall Street and the welfare state are fundamentally opposed. The attempt to blend them through personal accounts would create massive contradictions.
The role of Wall Street is to move investment funds to their most productive uses. If the process works well, the economy expands, living standards rise and the stock market advances. But inevitably there are losers, because Wall Street is an exercise in collective risk-taking. A free market means continuous trial and error.
By contrast, the welfare state is an exercise in collective risk reduction. It strives to provide some security -- aka the "safety net" -- against life's misfortunes and the economy's upsets. It aims to protect society's poorest and weakest members. We have many welfare programs. Social Security is the largest and most popular.
Personal accounts would be a strange hybrid: part "private" investment, part public entitlement. This is a hard straddle. There's an unavoidable dilemma: Making personal accounts safer for individuals might make the stock market less useful -- less dynamic -- for society. The conflict has already surfaced. One criticism of personal accounts is that they might subject beneficiaries to huge losses, because stocks fluctuate erratically. The administration counters that it would allow accounts to be invested only in "index funds" -- for example, funds representing the Standard & Poor's 500 stocks. The idea is to minimize the risk of big losses on individual or speculative stocks. Sounds sensible. But it would bias the market in favor of existing companies, industries and technologies. It would discriminate against the new, exciting and different.
If investment became too hidebound, it might slowly degrade the economy's performance. Conflicts like this won't conveniently fade away. Nor would personal accounts, if created, remain fixed for all time. As public entitlements, they would create their own ferocious politics. Millions of Social Security beneficiaries and countless interest groups would periodically agitate to modify the accounts, reacting to their own experiences or interests. The specter of rule changes would constantly hang over Wall Street; the larger the personal accounts became, the more the rules would affect how the stock market behaves.
What looms is a massive expansion of government power over Wall Street. To be sure, it would occur gradually, over decades, and its outlines are murky. The irony is that it comes from "conservatives." Facing the rising costs of federal retirement programs, practical politicians seek ways to cover the costs without resorting to unpopular benefit cuts. Putting payroll taxes into stocks seems one painless way out.
But even good stock returns can't erase the basic problem. The costs of federal retirement programs are growing much faster than any plausible portfolio of private accounts. Sometime between now and 2030, with the aging of the baby boom generation, the relentless increases in costs will force significant benefit cuts, big tax increases or both. The bipartisan consensus is to ignore this inconvenient fact. In their hearts, the Democrats want to do nothing. Republicans have at least proposed something. Unfortunately, it may be worse than nothing.