So in economic classes, many of them emphasize that for an individual, the best thing to do with your savings is to just stick it in a no-fee S&P 500 index fund. The market may go up and down, but historically you’ll break even over any (historical) 5 year period, and on average you’ll make about 7% over inflation, year over year.
So why didn’t the social security administration do this? It seems like it would be straightforward to legislate some basic guidelines for which companies to invest in (reasonable P/E ratios, the Feds would have the power to raid and examine the books of any company they are a shareholder in, they could legislate an automatic vote to limit executive salaries to some reasonable multiple of the average employee with the Federal shares) and the Federal government would thus have a vast fund that is always growing.
It even makes a kind of sense. Essentially, in a way, this means the government is holding on behalf of it’s citizens a piece of all the “means of production”. The government holds actual wealth, not just the power to tax, and would not need to tax incomes nearly as much since it would be making so much money just from dividends and share price appreciation. You could think of it as a trust fund on behalf of it’s citizens.
This would mean that the future threats to jobs that are predicted would be less of a problem. In the event that someone releases mass market autonomous cars and trucks, the government would own, on behalf of it’s citizens, a piece of those assets. As capital becomes ever more valuable from better and cheaper robots, and labor becomes less valuable, Federal revenues keep up.
Because congress would much rather spend that money than invest it. Also democrats go crazy anytime someone suggests privatizing social security to any degree.
You’re giving one of the reasons why it’s not a good idea right there. Political control of corporations via the subterfuge of ‘sovereign wealth fund’ wouldn’t be any more likely to result in an efficient economy than the older more direct ‘govt should own the means of production’. The decisions that build wealth are not necessarily politically popular. And it’s not a question of whether the profit motive ever results in stupid decisions, it often does. It’s how much stupider the decisions get if they have to pass political muster.
The actual big sovereign wealth funds either steer away from doing that and/or are in small countries investing mainly in foreign assets where there isn’t the same political pressure, or ability of the fund, to pursue goals like ‘keep that plant open’, ‘recruit CEO’s willing work for much less so we won’t be as bummed how much they more than us they make’, etc.
That’s besides the more basic macro problem. Unless you’re running a budget surplus, you have to issue more debt to buy real assets. The SSA hasn’t really ‘invested’ in anything. Its tax receipts (the FICA) tax just reduced the deficit from what it otherwise be as long as Social Security and Medicare payouts were less than FICA tax receipts. From now on they are going to be more. All the rest is accounting mumbo jumbo. The US having a SWF isn’t a scaled up version of a household saving money and investing in the stock market, it’s a scaled up version of a household taking on more debt to buy stocks.
Yeah, that was my first thought too. The Republican Party was all hot to trot to convert the entire Social Security system into a private enterprise investment firm, back at the turn of the century, making all sorts of grand or sarcastic statements about how much better off we’d all be, and how Americans should have a right to invest “their” money however they like. And about how fabulous private investments obviously were.
Then one day, it turned out that all of the major private investment companies had arranged to borrow non-existent money against non-existent property, and then re-lend it over and over, and had hollowed out the bulk of the wealth of the planet, and we were all about to be dumped into the deepest financial pit ever seen.
It should be noted, that the fact that we are recovering from that, is NOT due to private financial markets healing themselves, just as we didn’t recover from the so-called Great Depression by dint of private investing either. Both messes required extensive government meddling and financing to get things back on track.
If you read your history (not from the sources that the Right wing people like, from ALL sources) , you will find that without a LOT of government regulation, that the common behavior of capitalist markets, when controlled entirely by investors and lenders, invariably rise and collapse, leaving the majority of the lower classes scrambling just to get by.
I have no patience with any proposals to “let the wonders of for-profit investing” decide the stability of my retirement.
That’s why I was thinking just a few reasonable limits.
The reason for a ratio between CEO pay and worker pay is because in most cases, paying the CEO 20 million is just looting the company’s profits and giving them to the CEO. The government, holding a shareholder interest, wants those profits. There is no possible way that you get a better, harder working CEO because you paid 20 million instead of 2 million. If the average pay of graduate of an Ivy league business school who is in the top 10% of managers and has 20 years experience is, say, 300k, then you can’t pay the CEO more than 10 times that because you can realistically just hire one of those top 10% managers who will do about as well.
The reason for P/E restrictions is so the government doesn’t purchase overheated stocks.
The reason the government can raid the books is the government is using it’s state authority to prevent itself being defrauded. Unlike ordinary investors, it doesn’t have to sit there passively waiting for fraud to be discovered or question how a company is making so much money. It would be required to conduct the raid if it gets a solid tip that shenanigans are going on. (so in principle, if Madoff’s fund were a blue chip stock, the government would be compelled to raid to find out how he was getting such amazing returns)
Other than certain “automatic” provisions, I had in mind that the government would be a silent partner. It wouldn’t pick winners and losers, just invest in them all.
There’s a timing issue, which lasts decades. Currently, social security contributions from those in the workforce are used to pay benefits to the retired, the sick, etc.
You also have to ask yourself what the point of investing in shares would be. Essentially, the government promises current workers than, when they are retired, it will pay them a pension. When the time comes, the government will need to get the funds to pay the pension from workers, businesses, etc of the day, and then pass it on to the retired.
They can do that by taxing wages, profits, etc, or by taking dividends paid on stock held by the government. The cost of raising $1 in this way and paying it to a retiree as a pension is, obviously, $1. Essentially, producers are producing $1 and handing it over to the government, which then pays it to the retiree. What is the advantage of adopting a “dividend” mechansim for transferring the dollar to the government over a “tax” mechanism?
Famous last words . Your CEO discussion is based on your assumptions and opinions. It’s not at all obvious your particular ideas would result in a greater common good. But more importantly, it’s not at all obvious the political system would follow those particular ideas, or any particular ideas, rather than shift its policies around as political winds changed, once the concept was established of the govt having a direct (super) shareholder role in determining the internal workings of companies.
The basic difference between the political system and private sector capitalist system remains: one is focused on doing what’s popular, the other on what makes money. Again the private system makes plenty of wrong decisions about how to make money. But the political system just isn’t focused on it, even when it claims it is. The political system is more suitable than private capitalist entities to do some things, but running for profit companies is not one of them. Basically, conceptually, not contradicted by describing ‘certain reasonable policies’.
That idea of yours is a really bad one, and fortunately light years from being politically feasible in the US. The govt as owner opens up non-self limiting control, ‘reasonable’ only as long as the political system decides to be reasonable. Regulations have limits under the constitution; companies that have given unions board seats without ownership (more common in the Europe than the US) have done it in a negotiation for that specific right, etc.
And besides as other posts have pointed out, there are basic macro questions about how or why the US public pension/old age medical system, with its huge unfunded liabilities, not an entity seeking to invest a surplus (like Norway’s SWF), would acquire equities as assets even if it was limited to buying (and messing up) non-US companies.
The main reason equities come up wrt public pensions in the US is the proposal of privatizing public pensions (not socializing private sector companies). It’s not necessary in such a scheme that the money be invested in equities. You could have a system (theoretically, starting from scratch) where the money deducted from your paycheck for public pension went into govt bonds you owned, not into a general system promising you a pension. The idea of equities comes from ‘freedom to choose your own investments’ and ‘equities earn more’. But similarly to UDS’ point at high enough macro level there aren’t financial assets that ‘earn more’ that everyone can buy. There are just the underlying real assets of the real economy. Somebody has to buy bonds, or else financial assets are all stocks, but they earn less. Anyway also as UDS pointed out, due to the huge timing issue the political/economic window for privatizing Social Security is closed if there ever really was one.
The Social Security Trust Fund was created because of the Great Depression, so that stability of the fund was valued over the profit-making potential of the fund. The idea is that the government would take virtually no risk whatsoever in funding a minimum level of retirement benefits for the vast majority of Americans.
I cannot beat this dead horse enough: Social Security is NOT AN INVESTMENT IN YOUR RETIREMENT. There never was the intent to grow Social Security benefits to make people more wealthy in retirement. T
Social Security is basically an insurance plan, not actually that much different than many other insurance policies. Take life insurance: you pay your premiums, and then maybe some day something happens for which you are covered and you get a certain payout. Same thing with Social Security: you pay your FICA taxes and maybe you meet some condition for which you get to collect a benefit.
The money you pay in to State Farm, Farmers, Geico, or whatever isn’t “your money.” Just like the money you provide in FICA taxes isn’t “your money.” In both cases, it is money for a much larger pool, and there’s no guarantee that you will ever get to collect.
And Republicans go crazy any time somebody suggests socialism - which is what this proposal is. Stocks aren’t just a financial instrument; they represent a share of ownership. If the government started buying up stocks, it would effectively be buying up ownership of private businesses. Especially when you consider the size of what a sovereign wealth fund would be.
The big idea is that 7% historical return is a heck of a lot better deal for the government than anything else on offer. Had they done this from the beginning, we know in retrospect that the Sovereign fund would probably have more money in it today than the National Debt. Probably several times what the national debt is.
Basically, having an enormous pot of money in the form of productive assets that are producing more money is, in my book, a more financially secure and lower risk method (on the time scale of governments) than anything else. The government could hedge and buy stock in foreign companies as well, thus reducing it’s risk, such that it only ever loses asset value during global depressions.
As for where it would have gotten the money to invest - lesser known fact is, the SSA for years was running a surplus. More people were paying in than claims were being paid out. The SSA instead has essentially filing cabinets full of treasury bonds it has “invested” in. The SSA is the creditor to a significant portion of the national debt. Problem is that when those bonds come due, they aren’t invested in anything. There’s nothing backing them other than the word of the Federal government, that it will raise taxes and pay them. Recent events have shown how fragile the system actually is.
If the SSA actually owned real, tangible assets bought with those funds - like it owned 10% of all of Apple Computer and 10% of Exxon and 10% of Toyota and 10% of Aramco - I would argue that is a more sound financial footing.
Your idea has been discussed in these boards before. Besides the obvious concern that historic returns are not guarantees of future performance, having the federal government invest in publicly traded companies raises huge ethical and conflict of interest questions.
What he’s saying, correctly, is the full faith and credit of the United States isn’t something you can put in the bank. The government will have to collect taxes in order to pay off those Treasury bonds and issue Social Security checks as promised.
Or the Government could sell debt to redeem the bond. Or restructure the program to preserve surpluses. Not redeeming the lawfully issued bond is not a legal option.
ETA: and the argument about “if you can’t put it in the bank, it isn’t worth anything.” We know that the White House cannot be sold on the real estate market. Is it therefore valueless?
Congress nearly reneged on the “Full Faith and credit” just last year. It literally takes a smidgen of malfeasance by elected politicians and those debts stop being paid on time. The Constitution is a piece of paper and it requires members of Congress to respect it. Nobody arrested the members of Congress who nearly ruined a 200+ year old credit history for treason when they did it, nor would they have.
Again, for the hundredth time. A T-bill from the Treasury to the Treasury isn’t a debt. It’s an accounting trick. The 14th Amendment doesn’t apply here any more than any other clause of the Constitution.
All those T-bills supposedly sitting around for the trust fund can be burned tomorrow and will not change the trust fund one iota. Not at all. You can’t do that with real debt.
What makes you think this would hold true in a world in which the basic facts about the stock market have changed fundamentally? There is no conceivable reason to believe that the 7% number would still exist. That is not the same thing as saying that it must be less. It could be more. It could be 14%. But nobody knows and nobody can know.
Your version is not capitalism as we know it. Nothing much can be said about the returns of the stock market in that world. You can’t make that part of your positive argument.
. Your CEO discussion is based on your assumptions and opinions. It’s not at all obvious your particular ideas would result in a greater common good. But more importantly, it’s not at all obvious the political system would follow those particular ideas, or any particular ideas, rather than shift its policies around as political winds changed, once the concept was established of the govt having a direct (super) shareholder role in determining the internal workings of companies.