Greenspan Wary of Market Role in Social Security Rescue
Washington Post Staff Writers
Thursday, January 21, 1999; Page A1
President Clinton's surprise proposal to link the fate of Social Security more closely to the stock market began to stir doubts yesterday about how his initiative would affect the U.S. economy and prompted potent criticism from Federal Reserve Chairman Alan Greenspan.
A day after Clinton made an overhaul of Social Security the centerpiece of his State of the Union address, his plan raised fundamental questions about whether the federal government should assume an unprecedented role in the workings of private enterprise.
Greenspan, reflecting a wave of criticism that surfaced yesterday, contended that by pouring billions of dollars in Social Security reserves into Wall Street for the first time, the government inevitably would mingle politics into its investment decisions and would not produce the kind of returns that the administration hopes for. He also raised concerns about whether the government would end up in the business of picking which American companies are worth investing in.
"There is really no strong evidence to suggest any positive aspects of moving Social Security funds into equities," Greenspan, the chief architect of the government's last major revisions to Social Security 16 years ago, told members of the House Ways and Means Committee.
Such skepticism arose as Clinton moved swiftly into full campaign mode to sell his Social Security plan to the public at a rally that attracted an overflow crowd in Buffalo.
It remains highly uncertain whether the White House ultimately will marshal the political support in Congress to translate its framework for change into law – and Republicans lost no time in denouncing major features of the plan. Yet if part of Clinton's goal was to jump-start serious discussion over how best to safeguard the future of the nation's retirement system, the debate surfacing yesterday indicated that he has succeeded, at least for the moment.
"Social Security is no longer the third rail of politics," said Donald B. Marron, chairman of PaineWebber Group and a chair of a bipartisan committee of business and political leaders who have studied the nation's retirement policy. "It's front and center."
Although Clinton rejected the most far-reaching ideas for reshaping Social Security, his two-pronged proposal would represent the most sweeping change to the program since its creation in the depths of the Depression.
Both Clinton and Republicans have signaled they are eager this year to find a way to enable the program to withstand enormous financial pressures it will face starting in about a decade, when the baby boom generation begins to retire. But they hold sharply different views of how to accomplish that.
In his State of the Union speech Tuesday night, the president called for the government to help shore up the nation's Social Security system by pouring $2.7 trillion of federal budget surpluses into the program over the next 15 years, and investing up to one-quarter of that money in the stock market. Those steps would stretch the solvency of the program from 2032 to 2055, according to administration estimates. But private investments would be a marked departure from the current system, because the program until now has depended entirely on payroll taxes that are invested in safer but lower-earning Treasury securities.
Clinton also is proposing a new type of personal retirement accounts outside the Social Security program that would be designed to motivate Americans, particularly those with low incomes, to put aside more retirement money on their own. He asked Congress to devote $500 billion over 15 years to give a lump sum to anyone who opened such an account and to help match a portion of the money that people were willing to add to those accounts over time.
Administration officials have not decided how much money individuals would get as seed money to create these accounts, how the match would work, or the income above which people could not qualify for the program.
Even without such details, the basic idea of government-subsidized savings accounts drew questions from some economic analysts and politicians. "There's kind of a philosophical objection to it, because it creates an entitlement program as you promise to match those monies into the future," said Sen. Charles E. Grassley (R-Iowa), chairman of the Special Committee on Aging and one of many Republicans who favor creating individual accounts within the structure of Social Security itself. "Once the surplus is gone, you've still got that obligation."
Most of the critique of the White House proposal, however, dwelled on the precedent Clinton would create for investing Social Security funds in the stock market.
Greenspan offered enthusiastic praise for Clinton's idea of devoting much of projected federal budget surpluses to Social Security but disparaged the prospect of investing some of those funds in the stock market. Political temptations, he said, probably would motivate certain types of investments over others, thus basing decisions on considerations other than the best rates of return. As a result, he said, the government would probably earn less on its equity investments than the White House predicts.
Congressional Republicans and conservative policy analysts echoed Greenspan's criticism. "If the government owned all the equities, we wouldn't really be much different than the old Soviet Union," said Kevin Hassett, resident scholar at the American Enterprise Institute. "I think they'll want to tinker and the tinkering will be very damaging."
Administration officials and their ideological allies countered that such criticsm was overblown and distorted the president's intentions.
Clinton's top economic aide, Gene Sperling, said that, after it was fully phased in, money devoted to the stock market would account for only about 15 percent of the program's total reserves and for about 4 percent of the overall funds in the market. He also said that the surplus, not the stock market, would have the biggest effect on extending the life of the program. Even without relying on Wall Street, using the federal surplus money for Social Security would enable the trust fund to last until 2049.
Administration officials have not described exactly what method would be used to make the private investments. "We want to work with Congress and establish an independent and nonpolitical entity" that would oversee those investments, said Social Security Commissioner Kenneth S. Apfel.
But Apfel said "examples of this abound throughout the country at the state and local level and the federal level," noting that private investments are used by government pension programs, as well as the retirement savings plan available to federal workers.
Many pension funds for state employees have confronted the issue of whether investments can be insulated from politics, with mixed results. In the 1980s, when South Africa was ruled by the then all-white Nationalist Party, the California legislature passed a measure that forced the California Public Employees System (Calpers) to sell off shares in companies that did business with the apartheid nation. Calpers, which manages the pension plan for a million California state and local government employees, estimates that the divestment plan cost the fund about $500 million, according to spokeswoman Pat Macht.
The Clinton administration might also confront awkward investment decisions, according to investment analysts. It could find itself holding stock in Microsoft Corp. at the same time it was fighting Microsoft in court in a way that could hurt its interests as a shareholder. Or it could hold shares in RJR Nabisco while pursuing multibillion-dollar lawsuits against the conglomerate's tobacco company.
"Once the government becomes involved, there are difficult temptations," said Wayne Angell, an economist at New York-based investment firm Bear Stearns Cos. and a former member of the Federal Reserve. "If you can't invest in an industry because it doesn't meet a social test, then that enlarges the role of the government dictating to the private economy to a degree that many of us would find unacceptable."
Brookings Institution economist Henry Aaron, whose thinking formed part of the basis of Clinton's proposal, countered that the Federal Reserve system and the savings plan for federal retirees each has found ways to shield its investment decisions from political influence by hiring numerous private fund managers and allowing only certain types of investments.
But one former federal budget official doubted whether investment managers could be insulated from the potential hazards of government interference. "What happens five or ten years from now when President Andrew Cuomo [now secretary of the Department of Housing and Urban Development] comes along and decides to invest in low-income housing?" the official said.
Some analysts also fretted that government investment could further skew already steep stock market valuations. The anticipated government investments – about $30 billion to $40 billion a year – would be a large, but not overwhelming portion of the approximately $200 billion to $300 billion that has flowed into mutual funds in recent years. But if the government decided to put all that money into an index fund linked to the Standard & Poor's 500, that would tend to drive up the market values of those companies compared to others, widening a gap already at an historic high. "It would tend to favor big companies and not small companies," said Charles Clough, economist for Merrill Lynch & Co.
But Clinton, traveling yesterday to Buffalo and later Philadelphia, stayed far above such detail, focusing on what he has repeatedly called the nation's duty to take care of its surging population of elderly residents. "We cannot afford to squander this moment," he told the crowd of 20,000 at a Buffalo arena. "When have we ever had this many resources, this many things going right at one time in this country? It has been a long, long time."
Staff writer John M. Berry contributed to this report.
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