A while back, a story in The Onion detailed the Bush administration's plan to let Americans bet their retirement savings on their favorite sports teams. The Onion, of course, is not a real news source, but the truth hidden in that hilarious nugget was hard to deny: Most Americans are woefully ill-equipped to make intelligent investing decisions, and a nightmarishly shortsighted Social Security privatization could very well wind up letting people make investments that were no better than betting that their beloved Vikings would play in the Super Bowl. (Always a very bad bet, by the way. And I'm a Vikings fan.)

But an even harsher reality is this: The so-called professionals out there -- even the ones charged with the care and safekeeping of public money -- often "invest" just as poorly, especially in hedge funds that make big plays on options and futures and other mere opinion on the direction of the economic winds. Since they're not buying a share of real equity or assets, as they would when they buy a million stubs of Wal-Mart (NYSE:WMT) or Sears (NASDAQ:SHLD), when they lose, they lose big -- as the citizens of Ohio are just beginning to find out, thanks to some nifty investigative reporting at the Toledo Blade.

Ohio to Washington
The debate over privatization of Social Security has faded from the public scene over the past couple of months. For the sake of this argument, I'm going to skip over the many red herrings in the rhetoric, the foremost being that Social Security is a national crisis now. By reliable accounts, its impending insolvency is a lot farther off than, say, the day of reckoning for the plain old budget deficit, so those who are truly terrorized by monster debt would be better off stumping for reform on that sleeping giant.

Assuming that Social Security can use an overhaul anyway (I say "Why not?") and that privatization is going to be part of the debate (it will), I want to get back to a couple of key issues with any privatization plan, since they're so well illustrated by the cautionary tale from Ohio.

Many people claim -- not without cause -- that government is a terrible entity when it comes to efficient deployment of capital. I submit that there's a creature of far greater inefficiency, and that is the government-private hybrid. If you want a monster with all of the greed, all of the inefficiency, and twice the corruption, then go ahead and put government and private industry in a warm, moist, dark room, and see what grows.

I could rest my case by simply holding my nose and pointing a finger toward the continuing revelations about Air Force tanker contracting with Boeing (NYSE:BA) -- a "bailout for Boeing," as one Pentagon email put it -- or the stink about frisky accounting at quasi-public Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). But since that's old news, let's take a look at the sexier, made-for-Springer investment scandals in Ohio. (Click here for the Blade's whole bibliography.)

Hubbub in Ohio
First, the Ohio Bureau of Workers Compensation (BWC) made some $50 million in investments -- going back to 1998 -- with a rare-coin dealer, Tom Noe. It turns out that some $10 million to $12 million is now missing from that venture, and things get even fishier, with allegations of state money being used to purchase autographs and other collectibles, cooked books ($100,000 coins being later sold for $1) and a bizarre, multi-thousand-bottle wine theft at the Colorado home of one of Noe's business associates, from whom authorities had recently seized hundreds of rare coins.

Next up was the BWC's $215 million loss through investing in a losing hedge fund managed by MDL Capital. (That figure doesn't include the nearly $2 million in management fees that the state paid MDL over the years for the privilege of losing that kind of money.) More incredible yet, according to the Blade, this 96% loss of capital was accomplished in only a few months via losing bets on rising long-term interest rates. Final fun fact: State officials hid the losses for eight months.

Why would government entrust public money to firms that engage in such risky business?

Simple: politics as usual. The list of motivations in Ohio includes plain, crass cronyism (Tom Noe was a major fundraiser for the current and past administrations, which allegedly provided cut-rate vacation stays at his Florida home for well-placed politicians); old-fashioned nepotism (a daughter of a BWC oversight board member worked at MDL -- as the chief compliance officer, no less); and political correctness (an effort to do more business with "minority-owned" businesses).

Scandals like these get to the core of why I oppose any sort of government involvement in the investment of public funds. Yeah, I know. Nothing I can do to stop it now. But I'll tilt at the windmills anyway, thank you.

Quite simply, elected officials and their appointed lackeys are never going to be interested in maximizing risk-adjusted returns for public money. Instead, they are going to do what comes naturally: dole out money to those who help them on the campaign trail, use the public's financial leverage -- as has the California Public Employees' Retirement System (CalPERS) -- toward political ends, or just plain mismanage it by failing to exercise the kind of oversight that truly interested people would exercise. (I think the party interested enough in your financial future to make the right decisions is you, which is one of the main reasons I'm such an unapologetic Fool.)

Let's face it: Politicians tend not to question the motives of their supporters-cum-friends and business associates, so when these folks turn up and say have they got a deal for the public's buck, you don't even need outright criminal behavior for the arrangement to come out badly. A wink-wink, nudge-nudge conspiracy of well-meaning trust is good enough to stick it to the rest of us. The examples out of Ohio are stark proof. And that's what gets to the core of my fear of otherwise well-meaning efforts to privatize Social Security. Why should we expect any better on a national scale?

It's only news when it hurts
To be fair, no one that I'm aware of has proposed that we allow younger workers to invest their reclaimed Social Security percentages in hedge funds dealing with foreign exchange (forex) futures, interest-rate bets, or any of the other financial equivalents to entrail-reading. And I should also note that handing money over to hedge funds is a decision that many public and quasi-public bodies make every day, sometimes to their benefit. But that brings me to one of my key points about human nature, the kind of thing that makes most people, and especially their governments, bad investors: Everything is assumed to be fine until we have overwhelming proof that it's not.

As my colleague Bill Mann has pointed out in the context of scandals at Enron, Tyco (NYSE:TYC), and others, no one cares about stupid market bets, dumb business decisions, or even profligate and utterly crooked management so long as the stock price is going up. No way to account for Enron's dreamy (and dreamed-up) earnings? Who cares? The stock's going up! What's a few whizzing-David ice statues if Kozlowski's making us all a buck? Why quibble with our hedge fund over the extreme risk of its forex-futures bets as long as it's gotten them right for the last month or so?

The problem, of course, is that, in the long run, stupid market bets, dumb business decisions, and crooked management always lose money for the masses. It's just that no one cries about the stupid bets until they come up losers, and big enough losers that someone catches wind of the stench.

The fallout
Of course, I'm not the only one spooked by the possibility of pilferage of Social Security funds -- as that Onion story and plenty of anti-privatization hyperbole has made clear. As a result, I think we can reasonably expect regulatory oversight of the investment options in any privatized Social Security plan to be so restrictive as to squeeze out any possibility of market-beating potential.

Watchdog groups will be overly vigilant and raise holy heck should there be anything that smells, even slightly, of risk. I fear that the final compromise will be some kind of bastardized, "safe," blended mutual funds, which will, in all likelihood, fail to meet market averages. The best we can hope for will be market index funds that would track the S&P 500, underperforming by the amount of fees scalped off the top by whichever investment firms get in on the deal. (Currently, this Wall Street crowd is standing around, staring at its toes, salivating wolfishly, but trying its best to hide it by giving public sound bites declaring that it's not in the least bit interested in this kind of business. It couldn't possibly be a moneymaker. Riiiiiiggghhht.)

The solution
Others have proposed alternative privatization solutions that are so simple that I can't believe they have gotten so little traction in the national debate. Use the tools we've already got: A version of the government's Thrift Savings Plan, traditional or Roth IRAs, or incentives for maximizing existing 401(k) plans.

It would be far simpler for the Feds to just up the annual contribution limits on traditional or Roth IRAs, and let (or mandate that) workers divert a portion of their Social Security taxes into these vehicles. Most of them are already proven, and they are already supported by a robust and regulated private infrastructure.

How about something bolder, Uncle Sam? I'd sign onto a plan that waives my entire claim on future Social Security benefits if you let me reclaim just half of my Social Security withholding and divert it into my 401(k). Let me stash this money in my Roth IRA, and I'd ask for only 25% of it now. (And Uncky Sam, if you feel we need some kind of rock-bottom safety net, let me waive all but 10% of my future claims, just enough to keep me in Little Friskies should I really screw up.)

That's a pretty good trade, you'd have to admit. Give up only a quarter of what you're currently gouging me for, but remain on the hook for nothing down the line? Let the people most interested in their financial well-being -- future retirees themselves -- administer their investments? Makes perfect sense. But you can bet you'll never see my little plan get a hearing in the halls of public decision-making. I haven't paid nearly enough in campaign donations to buy friends on the inside.

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Seth Jayson has no financial interest in any of the companies mentioned. His editor on this piece is from Ohio but swears the coins in his closet were acquired on the up-and-up. Fannie Mae is a recommendation of Motley Fool Inside Value. View Seth's stock holdings and Fool profilehere. Fool rules arehere.