If index fund A controls the majority of shares in company B, and the government controls the management of fund A, the government can control company B.
However, even if the government does not attempt to exercise corporate control, there is reason to be concerned over allowing index fund managers to use taxpayer money to increase their ownership of corporate America. The huge number of shares purchased with Social Security money will represent powerful voting blocks, and, in contrast to most stock purchases, they will be uniformly voted. Yet these powerful new stockholders will not answer to anyone and will derive all of their new powers from the aggregated funds of average American citizens.
Never in the history of this country has there been a proposal to hand over this much power to unelected officials with this little responsibility attached to it. In essence, it is being proposed that the federal government use tax money to pick corporate winners and losers. With ownership comes control. What if a company whose stock is purchased by the Social Security trust fund decides to move its operations overseas?
What if the company is convinced by the authorities to keep its operations in the United States and this leads to a consistent stream of losses and subpar share performance? The investment itself provides the opportunity for central planning and control. After all, companies whose stocks are selected will receive a substantial investment boost not available to competitors who are not chosen.
This raises a host of questions about what types of investments should be allowed. For example, cigarette smoking is a major health concern to the nation and to the federal and state governments that spend public money to provide health care for those suffering from smoking-related diseases. Should Social Security be allowed to invest in cigarette companies?
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Is it appropriate for the Social Security system to offer price support to those shares while Medicare and Medicaid spend their resources in treating patients suffering from the long-term consequences of smoking? Other controversial issues are easy to imagine. Should Social Security invest in nonunion companies? Companies that make nuclear weapons? Companies that pay high corporate salaries or do not offer health benefits?
Companies that do business in Burma or Cuba? Companies that extend benefits to the partners of gay employees? The list is virtually endless. Public employee pension funds have long been subject to such controversies. In some states investments are prohibited in companies that are accused of pollution, unfair labor practices, or failing to meet equal opportunity guidelines.
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Some public employee pension funds are prohibited from investing in the alcohol, tobacco, and defense industries. Use of a passive index—either one created by the government or an existing one—would reduce, but not eliminate, the problem. There would remain questions about what stocks should be included in the index. Almost inevitably there would be a huge temptation to create a better, more socially appealing index of companies friendly to the public policies of the current administration or the current congressional majority.
The Clinton administration jumped on the idea with undisguised enthusiasm. But it is clear that some politicians are anxious to gain control over pension investments. A study by the World Bank of government-managed pension fund investments around the world found that such investments generally earned lower annual returns than privately managed pension investments.
One policy was to invest heavily in government securities, which earn much lower returns than, for example, in stocks. There are two reasons for this policy. First, there is a cautionary search for safe investments because governments fear the political reaction if a more aggressive investment policy were to lead to adverse results.
Second, buying up government debt allows the government to defer the consequences of its own overspending.
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Indeed, there is evidence that the power to shift government debt into pension funds may actually induce governments to spend and borrow more. The other investment policy pursued by government-controlled pension funds is to invest in government-supported projects such as state-owned enterprises or public housing. Again, the result is often extremely low rates of return. In fact, such investments frequently lose money. In addition, they wanted to avoid the investment of large sums of Government money in industry.
Isn't the Treasury really just shifting money from one pocket to another when it cashes in securities held by the Social Security trust funds? Does it have any practical effect? It is mainly a bookkeeping transaction. In practice, the chief significance is that the trust funds lose interest income they would otherwise have received. Why do some people say that cashing in the securities was illegal? First, they note, the Social Security Act requires the Treasury Secretary, as manager of the trust funds, to ''invest such portion of the trust funds as is not, in his judgment, required'' to pay current benefits.
Under another section of the law, they say, the Secretary must transfer to the trust funds, on the first day of each month, an amount of money equal to the payroll tax revenues expected that month. Did Secretary Baker make the transfer of payroll taxes last month?
Treasury officials say he did not transfer the payroll tax receipts last month or this month. Rather, they say, the money was kept in the general fund of the Treasury to help pay regular operating expenses of the Government.
It was not invested in Government securities, but the Social Security trust funds did receive credit for the money. What is the justification for Secretary Baker's steps? Treasury officials say the alternatives were even worse: failing to pay Social Security benefits or defaulting on Government obligations. Should Social Security beneficiaries be worried about these developments? Experts such as Mr.
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Ball, the former Commissioner of Social Security, say there is reason for concern, but not alarm. Ball said. They have just used it for other purposes. Can the Social Security trust funds recover the interest income they lost? Yes, but it would probably require a special law. Congress could appropriate money to make up for the loss and could direct the Treasury to reissue securities identical to those it canceled. Treasury Department officials say the redemption of long-term bonds to finance Social Security benefits is not an unusual practice.
But Representative Jones says it was done in the past only to meet the financial needs of the Social Security system, whereas now it is being done to avoid the debt ceiling. This, he said, is ''a new and unusual practice. Some people, in and out of Government, think so.
As head of the Treasury, he may wish to minimize interest paid on Government securities, but as a trustee of Social Security, he would want to maximize the interest earned by the trust funds. Treasury officials say Mr. Baker did what he did Friday because his overriding duty was to make sure that Social Security beneficiaries were paid on time. The interest could later be repaid to the trust fund, they said, but many elderly people could have suffered if they did not get their checks.
What is the Federal debt? It is the accumulated total of borrowing by the Government.
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If Federal revenue falls short of spending in any year, as it usually does, there is a budget deficit, and the Government must borrow more money from the public, which is added to the debt. Did the Government slip over the debt ceiling Friday before the Treasury canceled some of the debt it had issued to the Social Security trust funds?
Treasury officials say the Government did not go over the limit. But neither transaction was officially recorded until the end of the day, when the Government tallies the results of millions of transactions, such as the cashing of Government checks and the sale and redemption of savings bonds.
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