What We Should Have Done With Social Security

After posting on another blog of mine about the giant investment fund China is going to create with its foreign reserves, I thought I'd put up some thoughts on Social Security in the US and what we should have done while it was being widely discussed. I realize I'm a day late and a dollar short on this one, but hey, I just started blogging.

Conservatives were absolutely right to point out that a diversified portfolio that includes stocks and other assets will have much better return than pure treasuries. Adding a small amount of stock to an all bond portfolio can even lower the risk slightly. What was never clear to me was why this necessitated private accounts.

There's no reason the Social Security Trust Fund couldn't simply be managed like a university endowment. Universities have very long time frames and tons of money, and as a result they do better than almost any other investors out there. While I'm not sure if it would "solve" the "crisis" in Social Security, it would certainly improve the situation. It would also force congress to be more responsible. Buying treasuries just means giving the money to the government who promises to pay it back with interest. Any money that goes to the private sector would not be available to be frittered away on things like tax cuts, giant spending programs, and foreign wars.

Private accounts though, seem like a bad idea to me. For one thing there's almost certain to be corruption in the way the accounts are managed, and how companies are selected for what would be an enormous opportunity. Can we say no-bid contract?

Second, the idea of private accounts undermines the idea behind Social Security, which is not an investment, it's social insurance. That's why the poor get more than the rich, there's disability insurance, and spouse benefits. Yes, you get credit for what you put in, but the system is designed to help the less well off, and so the rest of us can be more comfortable taking risks (which is essential for a capitalist economy), knowing that there is some degree of a safety net for us.

Finally, the results of every American individually choosing what to do with their slice of the Social Security pie would probably be much worse than that of a combined trust fund. There may be wisdom in crowds, but if splitting up investment pools made lots of sense than pensions and endowments would be split up amongst many managers - they are not. Additionally, there would be significant administrative costs to keeping track of some 200 million or so accounts. It couldn't be cheap, and my guess is we wouldn't be getting a good deal.

Now, why couldn't someone have proposed this when Bush was stumping around the country trying to drum up support for private accounts?