SEC's Levitt Discusses Challenging Future of Social Security

The privatization of Social Security poses new challenges, Securities and Exchange Commission (SEC) Chair Arthur Levitt told an audience yesterday at the Institute of Politics (IOP).

Legislators fear the Social Security Trust Fund will be depleted by 2032. To save Social Security, many favor privatizing the system and putting the money into the stock market and other financial markets.

"Congressmen hate cutting benefits and they hate raising taxes," Levitt, whose agency is charged with protecting investors, told a crowd of about 50. "So it is not surprising that almost every reform proposal involves some type of market investment."

The question of privatization brings to the forefront questions about investor education, investor protection and governmental power, he said.

"What we are talking about today is nothing less than a watershed event in how Americans think about retirement security," he said. "An era of self-reliance has begun."

In keeping with its mission of protecting the investor, the SEC is working to prepare investors for the options they will face.

"There is an unacceptably wide gap between financial knowledge and financial responsibilities," Levitt said. "Closing this 'knowledge gap' is among the most important problems we face today."

Many investors might not understand that their money is at risk in the stock market, he said.

"I believe there is one word that every person in America has to understand--and that is risk. Risk is an indispensable part of our capital markets," said Levitt, a veteran of 16 years on Wall Street.

Along with a national coalition of business and consumer organizations, the SEC has launched the "Facts on Savings and Investment Campaign" as a first step in lessening investors' deficiencies.

The campaign gives people a chance to ask the questions they have about investment at town meetings.

"Only through education can we ward off the almost obvious potential for an increase in fraud in the marketplace," he said. "Giving people the ability to select investment options will provide the unscrupulous with new opportunities to deceive and distort."

The debate ranges outside questions of investor fitness to questions of how the funds will be administered.

In most proposals, the government would limit the options for investment. The SEC is responsible for ensuring that the government acts responsibly with this new power.

"Would the government have an ever greater incentive to control market fluctuations, if not the market itself? Could the government invest in a tobacco company? What about a company that was a toxic polluter a decade ago?" Levitt asked. "More broadly, assuming the government invests in individual equities as opposed to market indexes, would it be able to vote its shares?"

The SEC faces many challenges in regulating such a large and diverse marketplace that spans the entire globe.

"Because regulation is so difficult to enforce in this climate, it is often easier to nudge the process, rather than regulate it," he said.

Levitt made it clear that the SEC is actively pursuing all these questions with an eye towards their commitment to investors.

"Whatever the eventual outcome, the SEC will continue to aggressively combat fraud, promote investor education and diligently work to ensure that our markets remain the most resilient, innovative and transparent in the world," he said.