245. H. Jackson, Regulatory Problems in Privatizing Social Security, 11/98; subsequently published in Framing the Social Security Debate: Values, Politics and Economics, R.D. Arnold, M. Graetz, and A.H. Munnell, eds. (Washington, DC: Brookings Institution Press, 1998).
Abstract: This working paper, which will appear as a chapter of Framing the Social Security Debate (forthcoming Fall 1998) (Brookings Institution Press), discusses two regulatory problems associated with the privatization of social security: first, the risk that political interference with social security investments in equity securities will disrupt private capital markets and reduce returns on social security assets, and, second, risks associated with variations in investment return that individual participants might experience under a privatized social security system. In brief, the paper suggests that, while the investment of social security assets in private equity markets could give rise to problems of political interference in those markets, there are various ways in which such investments could be structured and managed that would reduce the likelihood of these problems actually arising. As to concerns that political interference might reduce expected returns on social security assets, the paper argues that past experience in other areas of financial regulation suggest that any reduction in returns from political interference is likely to be less substantial than the expected increase in financial returns associated with transferring a portion of social security investments into equity markets. With regard to variations in individual returns, the paper reviews various reasons why some individuals might be expected to experience lower rates of return under a privatized social security system than they do under our current system, even though privatization might generally be expected to increase average returns on social security assets. The paper then considers a variety of regulatory tools that could be employed to reduce the range of variation in individual returns.