Social Security: There is No Trust Fund, Only IOU’s

On Tuesday, President Bush had the most bizarre cabinet meeting any president is ever going to have. It was a meeting with an actual cabinet. A filing cabinet. A filing cabinet in Parkersburg, W. Va., to be precise.

Strange? Yes. But then again this is a very remarkable filing cabinet. By one way of looking at things, it contains $1.7 trillion dollars. But by another, it contains nothing at all.

Of course I’m taking about the filing cabinet in the offices of the Bureau of the Public Debt that holds the assets of the Social Security Trust Fund.

After the meeting, President Bush declared, “a lot of people believe that the Social Security trust is — the government takes a person’s money, invests it, and then pays it back to them upon retirement… It doesn’t work that way. There is no ‘trust fund,’ just IOUs that I saw firsthand…”

In other words, there’s nothing there.

The president’s opponents were quick to look at it another way. Democratic congressional leaders Harry Reid and Nancy Pelosi said the same day, “It is simply wrong to suggest that the Social Security Trust Fund does not exist, or that the securities held by the Trust Fund are merely pieces of paper. For a president to even suggest that the federal government might, for the first time, default on a security backed by the full faith and credit of the United States unnecessarily misleads American workers…”

Who’s right? Is the president right, that the Treasury bonds held by the trust fund are “just IOUs”? Or are the Democrats right, that those bonds are sacred obligations of the United States, just like any other Treasury bond?

Is the president raising valid concerns about the way Social Security is financed? Or, as the Democrats charge, is he threatening to default on the nation’s debt?

Both the president and the Democrats are right in their own ways. But that means, necessarily, that both are wrong. I told you it was a remarkable filing cabinet.

Here’s the truth about it.

The Democrats are correct that the Trust Fund’s cabinet holds actual Treasury bonds, and those bonds are every bit as real as the Treasury bonds you probably have in your IRA or brokerage account. Those bonds — the Trust Fund’s and yours — are backed by the full faith and credit of the United States, and a default on any of them would be an unprecedented and unthinkable catastrophe for our country.

And nothing whatsoever that President Bush has said should be construed as a threat to default on those bonds. So don’t worry — at least not about that. Period.

There’s one very important thing, though, that makes the Trust Fund’s Treasury bonds different from yours. You aren’t an agency of the US government, but the Trust Fund is. That means when you invest in Treasury bonds, they represent a debt owed by one party to another — in this case, the government to you. But when the government itself invests in Treasury bonds, those bonds represent a debt owed by one party to itself.

You can’t owe money to yourself. What would it even mean to borrow 20 bucks from yourself today and promise to pay it back to yourself on Tuesday?

Here’s another way to think about the problem. Social Security is a commitment by the government to make payments to people in the future. The Trust Fund exists, supposedly, to secure that commitment by setting money aside today — so that in the future, the money doesn’t have to come from taxes, borrowing, or spending cuts. Fine — in principle. But when that money is invested in Treasury bonds, those bonds themselves will have to redeemed in the future, and the money to do that will have to come from taxes, borrowing, or spending cuts.

Of course that makes the Trust Fund’s Treasury bonds no different from yours or mine — they all have to be repaid someday from taxes, borrowing or spending cuts. But my point is that when the Trust Fund holds them, it doesn’t accomplish anything. Whether the Trust Fund holds Treasury bonds or nothing at all — or for that matter, whether or not the Trust Fund exists — to pay benefits in the future, the government is going to have to tax, borrow or cut spending.

So in that sense, President Bush is absolutely correct when he says “There is no ‘trust fund.'”

That makes the Democrats wrong when they fret that Bush’s statement amounts to threatening to default on government debt. Think again about the 20 bucks you lent yourself. Suppose you refused to repay yourself when Tuesday rolled around — is that a default? Would you sue yourself to recover the money you owed yourself?

In other words, since the existence of those Treasury bonds doesn’t really affect the government’s wherewithal to pay benefits one way or the other, then it would make no difference whatsoever if the Trust Fund simply surrendered them, or for that matter tore them up and threw them in the ocean.

What could be done to make the Trust Fund real?

Simple — invest it in just about anything but Treasury bonds. Invest it in real estate. Stocks. Bonds. Whatever. Anything but an obligation of the same government that already has an obligation to pay Social Security benefits.

Now some people think it would send a dangerous signal to world capital markets if the Trust Fund ever stopped investing in Treasury bonds, as though that were a vote of no confidence in our nation’s own creditworthiness. Hardly — at least not any more than the current state of affairs represents a vote of no confidence in American industry just because the Trust Fund doesn’t invest in stocks. I think the capital markets would be delighted to see the Trust Fund invest in securities not issued by the same government by whom it is controlled — just as they would surely prefer to see the IBM pension fund invest in something other than IBM’s own bonds.

Now if you don’t like the idea of the federal government investing trillions in private markets, then the solution is — a drum-roll please — personal accounts.

In fact, those personal accounts could even be invested in Treasury bonds — and that would truly be an investment. Why? Because it would be a true debt commitment between the US government and you — not between the government and itself.

Think of your personal account as your own personal filing cabinet, for your own personal trust fund.

Or better yet, let’s call it your own personal lock box. Hey, that’s something the president and the Democrats ought to be able to agree on. After all, wasn’t it Al Gore who thought a lock box would be such a good idea?

The above is an “Ahead of the Curve” column published April 8, 2005 on, where Luskin is a Contributing Editor.

Debating Social Security

In a romantic mood, I was reading “Anna Karenina” flying down here and stumbled across one of Tolstoy’s brilliant insights.

At a party at the home of his friend Prince Oblonsky, Konstantin Levin, the philosophical farmer, muses about the futility of dinnertable debates.

Tolstoy writes: “Levin had often noticed in discussions between the most intelligent people that after enormous efforts, and the enormous expenditures of logical subtleties and words, the disputants finally came to be aware that what they had so long been struggling to prove to one another had long ago, from the beginning of the argument, been known to both, but that they liked different things.”

This is the way I feel about the debate over Social Security. Forget about the projections of fiscal calamity or paradise. We have known from the beginning of the argument the central fact: the two sides like different things.

One side likes the government to take care of people, whether they need it or not. The other side — which I’m on — likes people to make their own choices and take responsibility for their own lives.

The first side sees Social Security as “social insurance” — the most persistent vestige of the collectivist approach to solving public-policy problems. The other side sees freedom as the route to personal and national prosperity.

Just as we buy our own food, clothes and shelter, we should put away a little bit at each pay period for our retirement. Yes, we need to take care of people who can’t earn enough to build a nest egg. But, for the vast majority of Americans, saving for retirement over 40 years isn’t particularly difficult or risky. It’s a lot safer than going deeply into debt to buy a house — which two-thirds of families do.

Each side marshals the numbers to prove it’s right, but numbers really aren’t the point. This is a clash between two starkly different visions — between people who like different things. The best way to change what people like is not through math but through chemistry — that is, through appeals to ideals and ideas.

But, just as the Bush Administration failed — until the president’s 2005 inaugural address — to make the right case for the war in Iraq, it is failing to make the right case for Social Security reform. On Iraq, America went to the U.N. with legalisms instead of principle, a vision of democracy as a force that makes the world more safe. Social Security reform, similarly, is rooted in the principle that personal liberty is a force that makes America richer and more secure.

In both cases, the simple truth is that we like freedom and responsibility while the other side likes collectivism and intervention.

There’s no doubt that the left understands what’s at stake. In a roundtable on the future of the Democratic Party, Michael Tomasky, executive editor of The American Prospect, was asked Sunday by the New York Times, “Is there some meeting ground?”

“Not on Social Security,” he said. “As a principle Social Security is inviolate.”

Why? First, because it is all that remains of the New Deal, the shards of a sinking ship to which Democrats believe they must cling. Second, because, if personal accounts are realized, the proportion of Americans with a stake in the stock market will rise from half to about four-fifths. And when people own stocks, they become friendlier to free markets and more inimical to government interference.

Aspiring nations have already caught on. In a speech March 2 at the American Enterprise Institute’s annual dinner, the Peruvian novelist and political theorist Mario Vargas Llosa pointed out that in Latin America, 11 countries have reformed their creaky pension systems with personal accounts in recent years — “whereas the more backward left in the United States opposes the privatization of Social Security.”

Why so retrograde? Because the institutions with power on the left — not the Democratic Party but labor unions, the press, the AARP, academe and anti-globalizers — don’t want change. Their nightmare is union members with large-cap mutual funds, seniors who don’t rely on checks from the U.S. Treasury.

This is not the time for the Administration and congressional Republicans to go wobbly on Social Security. Instead, in this contest over likes, not numbers, it’s time to take the gloves off and start slugging it out over principle.

A Giant Step to Improving “Social Security”

Last April, I had the opportunity to sit across a table from President Bush and discuss his plans for the economy. I asked him what his most important policy priorities were, and he gave me a refreshingly simple and direct answer: “In the first term we’re going to cut taxes. And in the second term we’re going to save Social Security.”

Well, so far he’s been a man of his word — he cut taxes. But now for the hard part: to come to grips with the government’s single largest and most politically sacred program, and one that also just happens to be a massive economic time bomb. Make no mistake about it, Social Security as we know it simply isn’t sustainable without either significant benefit cuts or substantial tax increases.

Bush hasn’t even gotten re-elected yet, of course, but his administration is already hard at work laying the groundwork for saving Social Security in what it hopes will be a second term. The latest step in the master plan was the floating of an important trial balloon in the form of a proposed roadmap for Social Security reform by Peter Ferrara, director of the International Center for Law and Economics and adviser to the Club for Growth, an influential conservative political-activism organization.

Ferrara’s proposal is a bold one. About half the taxes currently paid by workers into the Social Security system would be directed to individual accounts that would operate much like a 401(k) plan. Taxpayers would have a choice: to either opt out of the old system in favor of the new individual-account system, or to stay just as they are today.

Those who choose the new system — and play by prudent asset-allocation rules that would be specified — would be guaranteed that their results at retirement would be no worse that under the current system. You’d have the option to take more investment risk in an individual account, but if you do that then you’d lose the government guarantee.

When you take money out at retirement, it would be entirely tax-free.

Obviously, anybody with half a brain would opt out of the old system and into the new one. Think about it: You can’t do worse because of the guarantee, and you might do better. In fact, you might do a lot better. Right now the effective return-on-investment for new Social Security system participants is less than 1% a year.

Hold on. At this point you must be saying, this is too good to be true. How could America possibly afford such a fantastic system when we can’t even afford the one we have now?

That’s probably why Ferrara’s proposal didn’t get a lot of traction when he first issued in six months ago. But now the game has changed. Last week Steve Goss, the chief actuary of the Social Security Administration, issued a lengthy memorandum evaluating Ferrara’s plan. He found that not only can the system afford it, but that Ferrara’s proposal powerfully strengthens the system’s long-term solvency.

How can this be? Like most magic tricks, the secret is actually very simple once you know it.

For starters, every Social Security participant who opts in to the new system is, at the same time, opting out of the old one. That makes the old system far, far smaller.

Then the new system puts tax dollars to work in America’s capital markets. Individual accounts would be invested in stocks, bonds, mutual funds, variable annuities and so on — all of which can be expected to earn a far higher return over time than the Treasury bills that currently make up the Social Security Trust Fund.

Sure, there are lots of messy details about how we’d have to manage the transition. I won’t go into them here, but Ferrara and Goss have them all figured out — and they will work. The bottom line is that the combination of shrinking the claim on the US Treasury and putting tax money to work in markets can save the system from what is otherwise certain disaster.

There are other benefits. They’re intangible, but they’re important, too.

First, the opportunity for Social Security participants to earn more than the current system’s paltry 1% or less will make a real difference in the lives of every American who is counting on Social Security income in retirement. For many Americans who earn modest incomes, Social Security taxes soak up the only investment dollars they’ll ever have. Earning 5%, 6%, 10% — who knows? — over a lifetime makes an enormous difference in retirement wealth.

Second, as every American worker with a 401(k) plan has learned, the challenge of making personal-investment decisions — and seeing your balance go up and down every quarter — makes you a “stakeholder” in American enterprise. Yes, it can be a source of anxiety. But it’s also a source of great satisfaction and pride.

Third, today’s Social Security participants are, in essence, at the mercy of the state. Your Social Security account is not your property (you can’t, for example, leave it to your heirs). Benefits aren’t contractually promised; they’re at the whim of some future Congress. Under an individual-account system, your account is your personal property while you’re alive, and part of your estate when you die. And the benefits are whatever your investments have earned, no matter what the politicians may say.

Twice now, in 2000 and 2002, George Bush has campaigned successfully on a promise to reform Social Security. He has proven that this issue isn’t the third rail of American politics. The public really is hungry for reform. Now, we’re almost a year from the presidential elections, but he’s starting to campaign on this issue again already.

I’m not going to suggest whom you should vote for. Sure, I believe that Social Security reform is just about one of the most important issues in America’s future, and I’m delighted to see Bush taking a courageous position on it. But this can be anybody’s issue. So here’s my challenge to the field of Democratic candidates: Take a hard look at Social Security reform, and see if you can beat Bush at his own game.

Originally published on

Social Insecurity: 401(k)s Under Attack

401(k) retirement plans — those marvelous engines of empowered financial liberation, in which an employee decides how much to contribute toward his own tax-advantaged retirement account, and directs the account’s investment himself — have come under heavy attack over the last couple years by paternalistic statists who want to keep you poor for your own protection.

When the Enron scandal unfolded, it turned out that a lot of Enron employees had invested their 401(k)s in Enron stock — which subsequently evaporated. And more broadly, as the bear market of the last three years has played out, many 401(k) investors have seen their account values decline for the first time — in some cases quite severely. The paternalists whine that this is the inevitable tragedy that occurs anytime you let people manage their own lives. Oh, for the good old days when trustworthy companies managed pensions on behalf of their employees — and shame on anyone who would suggest that people should manage their own private Social Security accounts!

I’ve always wondered why anyone who claims to be concerned with protecting employees would so urgently not want them managing their own pensions that they would prefer to have Enron do it for them. And the answer I always got was, “If Enron screws it up, the employee is always covered by the Pension Benefit Guaranty Corporation.” That’s the government agency that stands behind corporate pension funds, roughly in the same way the Federal Deposit Insurance Corporation stands behind bank accounts.

Now it turns out that there have been so many corporate bankruptcies in the last couple years that PBGC’s $8 billion trust fund may not be enough to meet all the liabilities it’s had to assume. That doesn’t mean that PBGC doesn’t have the cash to pay pension benefits — it does, for many years to come. What it does mean is that PBGC is “underfunded” — in other words, the value of its trust fund is less than the actuarial present value of its liabilities.

There are only two-and-a-half ways that the PBGC can get back up to full funding. The “half” way is to hope that interest rates go up, which will lower the present value of PBGC’s liabilities (hopefully more than it will lower the value of PBGC’s assets, all of which are in government-issued bonds). But if that doesn’t bail out PBGC, they’ll either have to increase the mandatory premiums that they charge companies with pension plans, or take money from general tax revenues.

So…connect the dots. It doesn’t take a genius. Kill 401(k)s (for the employee’s own protection, of course), and its a short step to full-out taxpayer funding of pension benefits. It’s just Social Security, all over again. Don’t they ever learn? Don’t you?

Interview of Wade Dokken: The Social Security Crisis and What to Do About It

“By creating private accounts, you’d create private assets and private assets could be passed onto another generation as capital. And I think that would change the lives of millions of people,” says Wade Dokken. And Wade would know. A former advisor to Hillary Clinton, he is the President and Chief Executive Officer American Skandia, Inc. a financial services companies in the country, with more than $30 billion in client assets under management.

James Glassman: Wade Dokken, you have written a book about Social Security, what ‘s the title?

Wade Dokken: “New Century, New Deal, How to Turn Your Wages into Wealth through Social Security Choice.”

James Glassman: You know, so many people who write about this subject are policy wonks like me. How did you get involved in it?

Wade Dokken: Well, that’s a great question. I have always loved public policy but this was more motivated by a series of things, I would say three or four things. One is my love of public policy, my access to information about how out of line our Social Security system is and what we can do about it, and the fact that I, like a lot of people, am a parent and I have three boys for whom I know the Social Security system is not going to deliver.

James Glassman: Now, what would you like to see as far as reform for Social Security is concerned, just briefly.

Wade Dokken: Well, the most important thing we need to do is we need to have a funded versus an un-funded system. We need to be honest about putting aside money now for the retirement of people at a future date. Today we’re not doing that.

Once we’ve established a funded system, I believe we need to invest it in what I call a modern way, so that those assets that are set aside are being invested as any modern portfolio manager would invest assets, whether that’s like the state of California or the state of New Jersey or anybody’s 401K.

James Glassman: When you say a “funded system,” I think this is worth spending some time on. How does the current Social Security system work and how is it similar or not similar to a conventional pension plan?

Wade Dokken: Well it’s not similar to any other pension plan because the law of the land of the United States is that you can’t have pension plans like Social Security. Social Security does not have any assets set aside for anybody’s retirement. It’s a pay-as-you-go system. You and I as under 62 or under 65-year-old taxpayers pay money in, and people who are now receiving Social Security receive that money within 30 days. It’s a conduit system. What we pay in, somebody else receives. Therefore it is dependent upon, when I retire, another generation of people to be doing the same thing.

The problem is — and it is the crisis question — the demographics of this nation have changed profoundly in two ways. One, longevity has increased tremendously so we have an ever-increasing percentage of our population that is over age 62, 65. And all those subgroups are the largest growing groups of our population.

The second part is our birth rates are way down. So not only are we living longer but the replacement population is smaller. When Social Security was created we had 43 people supporting every retired person. Today we have 3.1 and in a very short matter of years we’ll have two people supporting every retired person. It won’t work.

James Glassman: And so your solution is to allow individuals to invest part of what they now pay in payroll taxes in private accounts in stocks and bonds, is that correct?

Wade Dokken: That’s correct. That’s the third part. I said number one: a funded system. Number two: invest in a modern way. And the third conclusion, I believe, is to allow people to at least have the option of having their money invested in private accounts.

James Glassman: And exactly how would that work? Would people be free to put their money just about anywhere, the way they do now with 401Ks? The 401K plan, of course, is limited by the offerings of the employer. But there are hundreds, probably thousands of choices, is that the way this would work?

Wade Dokken: I doubt it. It’s not what I would recommend. Social Security is the foundation retirement plan for all Americans. And as such, if that money is squandered in any way, you would have a social crisis. So I think what would happen is there would be some significant limitations.

I believe a recommendation would be to let people invest in bank CDs which are guaranteed and are very safe and have a rate of return that is far in excess of Social Security’s rate of return today.

It is also possible that you allow people to stay invested in a Social Security system and that all the money is held in a pooled account and managed like any other state pension system.

A third option is to allow people to have a limited number of choices and those choices would probably be automatic portfolios that have a combination of stocks, bonds, and cash so the risk would be very low.

James Glassman: Now when you said your second option, which is pooled accounts, are you saying that you think that it would be a good idea if, let’s say, government employees or a government-run board were to make investment decisions for Americans? That is what, I guess, Alan Greenspan has been alarmed about, the notion of the government itself becoming a large shareholder in American corporations.

Wade Dokken: I think it’s a possible outcome, but it’s not one that I support. The reason I don’t support it is I believe the politicization of it would be too great. For example, if the government owned the stocks, who would vote the shares of those stocks? I think that’s a problem. I think quickly it would be politicized another way, in which the government would set up laws that we can’t invest in certain types of stocks.

So it’s not a proposal that I personally support, but I think it is a proposal that is supported by almost half the people in Congress.

James Glassman: But you don’t think, in general, that people should have a wide range of choices. Another model might be the thrift savings plan, which is kind of the federal equivalent of a 401K plan.

Wade Dokken: I think that’s a very good model. It has five choices. It’s a great model because there are limited choices, they’re indexed funds, and there are very low fees.

Currently there is a way to save for college education which is known by a lot of people, it’s called a 529 plan, and what occurs in 529 plans is, you get those five choices. But there are combinations of stocks and bonds already established. So, for instance, as you’re younger, you’ll have a higher percent in stocks. And as you get older and you have less time to take risk, [the plan] would automatically [move savings] to a lower [risk of investment]. And I think some kind of structure like that would ultimately be the best thing to do.

James Glassman: Now let me get this straight. Is a reform of this nature intended to save Social Security in a financial sense? Or is it to provide Americans with a way to own their own retirement plan and have more money when they retire?

Wade Dokken: Well, I would argue that it’s both. Social Security is a bankrupt system. At one point, we can model that it will be $27 trillion in deficit in about 30 years. So there’s no financial scenario except for a growth rate for the U.S. economy sustained over decades that we’ve never achieved that will bail it out.

Having said that, one of the things that is important to realize is that the kind of implicit rate of return for Social Security today, for people under 50, is approximately zero. And it gets negative as you get younger. Compare that to the worst 50-year period for the stock market, which is plus 4 percent.

So we can save Social Security and at the same time create an income stream for people retiring which is greater than Social Security.

James Glassman: Now some people say this is not a good time to bring up the idea of reform that involves any kind of stock market investing. Isn’t it risky for Americans to have their retirement dollars tied up in the stock market?

Wade Dokken: Well the risky scheme would be to do nothing. I can guarantee you that people will lose money on Social Security if we do nothing. So if guaranteed loss of your investment principle is safety, then we have the safest system we can create.

Having said that, there’s no level of analysis that does not tell you that owning a basket of stocks and bonds over a long period of time is going to produce superior returns. And the risk is focusing on the very short period of time, or the risk is having an insufficiently diversified portfolio, both of which would be solved by using indexed funds and having long-term, pooled accounts.

James Glassman: So the point is that over a long period of time, if you have a diversified account, the riskiness of
stocks is

Enron and Social Security Reform II

Today I’m going to revisit a theme that I believe is the most important of all — the revolution in the empowerment of the individual investor to make his own decisions and take his own risks. It’s critical that we look at this now, because with the recent volatility of stock markets — and even more so over the last week with the collapse of Enron — the critics of empowerment are seizing the opportunity to try to turn back the revolution.

In a previous column I called reform of the Social Security system — to include private accounts that people can manage on their own — the Next Big Thing. And it’s the next logical step in the revolution in investor empowerment, following naturally on the widespread adoption of 401(k) plans and do-it-yourself online investing.

And it just happens to have the power to rescue America from the greatest single threat to our long-term prosperity: the metastasizing cancer of the insolvent current Social Security system. It’s already the single largest government program in the world, and every day it gets both larger and increasingly unable to meet its obligations. Solving this problem by putting power over investment decision-making into the hands of program participants is not only necessary — it’s the right thing to do for the sake of freedom and human dignity.

But the current bear market in stocks — intensified by the drop following the Sept. 11 terrorist attacks — has given the critics of reform the chance to fret that markets are just too risky for ordinary people’s retirement safety nets. And now the collapse of Enron, many of whose employees have lost money in company stock held in their 401(k) plans, has given the critics even more to wag their fingers at.

But as I wrote in a column questioning the “401(k) gospel of equities,” the long-term case for earning superior returns by bearing the risk of investing in stocks is hardly altered by the unsurprising fact that there has been yet another bear market. The vibrant recovery since the lows of September shows how important it is not just to stay diversified, but to stay invested and stay the course.

And now, several thousand Enron employees — employees of a single company out of thousands — have lost a chunk of the value of their 401(k) savings because that portion voluntarily contributed by their employer in the form of its own stock has become worthless. I’m very sympathetic to their plight, but Enron didn’t have to contribute that stock in the first place, and employees had the choice of working somewhere else where such risky gifts were not given. And the majority of their 401(k) savings, which they had the power to invest in a variety of totally unrelated and well-diversified investment options, is totally unaffected by Enron’s problems. Yes, on a localized basis, it’s tragic. But the system works.

And what is the alternative?

In the good old bad old days before 401(k) plans, Enron would have offered a “defined benefit” plan — much like a corporate form of Social Security — in which it would promise particular payments for an employee’s lifetime after retirement. The employee would have had no say in how much risk Enron took as it invested in order to meet that promise. If Enron’s investments went bad, or if Enron itself went under, there would be some assets held in trust to at least partially meet the promise. And the government-backed Pension Benefit Guaranty Corp. — a kind of FDIC for pension plans — would probably pick up at least some of the slack at taxpayer expense: solving the problem that way would be cold comfort, indeed. And if we can’t trust the Enrons of the world enough to be thankful for some of their stock contributed to augment our own independently managed 401(k) contributions, then how can we trust them to manage 100% of our retirement savings?

The same goes for Social Security, only more so. Yes, with individual accounts each investor is at risk for the consequences of his own decision-making, and if he is terribly foolish or if there is a string of horrific bear markets, it’s possible that he would end up with an inferior investment return over his lifetime. But right now the rate of return offered by the Social Security system is less than 2% a year — and that’s presuming that the government doesn’t lower that rate of return by raising payroll taxes or cutting benefits (both of which it has done repeatedly in the past) or simply abandoning the whole system altogether at some point when the budget pain gets too great. So how much worse could the average guy or gal do on his or her own?

When those quarterly 401(k) statements showed up at the end of June it was a disappointment for many investors used to the endless fountain of bull-market returns from stocks. When the statements showed up at the end of September it was a downright shock. And Enron employees — or ex-employees, to be more precise — won’t have a very merry Christmas imagining the drop they’ll see at the end of December. But none of that alters the fact that the promises of the Social Security system simply cannot be kept. It’s a comforting fantasy, but it’s a fantasy. You can’t get there from here. We can’t tax people enough today to pay the benefits promised twenty years from now — at least not without fomenting armed revolt.

And it’s not because the Social Security system isn’t taking enough risk with its investments. Indeed, it’s taking the ultimate risk — the risk of not investing at all. The so-called Social Security Trust Fund simply buys government securities very much like Treasury bonds — which is the precise equivalent of the Enron pension plan funding its promises by buying bonds issued by Enron. That’s money that simply gets spent — by the government, just as it would be by Enron. So when it’s time to pay the benefits, the bonds come due. And what if the government — or Enron — can’t pay?

Well, the government can do something that Enron can only dream about — it can print however much money it needs to pay back those bonds when they are due. But that’s not money: that’s paper.

So it all comes down to this: there’s no riskless solution here. It’s just a question of which kind of risk you want to take. Do you want to take the risk of millions of different people each pursuing their own independent investment strategies, some doing brilliantly, some doing poorly — or do you want to take the risk of all of us doing precisely the same thing at the same time, pouring our tax dollars into current government spending disguised as investment, so that if everything goes as well as possible the government will print money to pay us someday at a rate of return of less than 2%?

Between those two risks, I’ll take the risk of empowering individuals to make their own investment decisions and make their own investment mistakes in a heartbeat. Besides, even if the two risks were precisely equal (and they’re not: one’s a legitimate investment risk with a commensurate expected return, and the other is simply throwing money down the memory hole), I’d pick the one that maximizes the freedom of the citizens of a free country.

On December 5, 2001, the Department of Labor announced that it was investigating Enron for possible violation of rules under ERISA, the federal regulations that govern corporate pension funds. The rules are clear and so are the penalties. If Enron has broken the law, it and its executives must pay the same price as any lawbreaker. But this development only strengthens my arguments. Employees investing their own money through 401(k) and other pension plans that allow personal control of investment decisions is the best way to avoid this kind of alleged corruption. The cry to return to “the good old days” when paternalistic companies — and government — does the investing for you would be to invite further abuses of this type.

And that means taking the challenge of retirement investing out of the hands of the government, and out of the hands of Enron, and putting it where it belongs: in our hands.

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