Market Experts Like Social Security Plan
Washington Post Staff Writer
Wednesday, January 20, 1999; Page A10
President Clinton's proposal to have a small percentage of Social Security money invested in the stock market could be just the tonic Wall Street needs to keep its bullish streak running into the 21st century.
At least that's the conviction of market watchers, who note with glee how the invention of individual retirement accounts and 401(k) accounts have transformed the markets in the past two decades. Last year, almost $20 billion a month in new money flowed into the stock market from mutual funds.
But some experts caution that such a huge shift could further pump up stock prices that some already consider inflated, while possibly hurting the bond market.
Clinton is proposing diverting 62 percent of an anticipated $4 trillion federal budget surplus over the next 15 years to Social Security, then investing less than one-quarter of that amount in the equity markets instead of Treasury securities, in which the fund now invests.
Clinton also wants to take another 11 percent of the budget surplus to establish "universal savings accounts," which would be similar to the 401(k) accounts that many employers offer. Together, the two proposals could add as much as $6.5 billion or so a month to the market.
"Obviously it's another money-flow positive," said Anthony Dwyer, a market strategist at Ladenburg, Thalmann & Co. in New York. "Over the near term and long term, it will only help the market."
Advocates of reforming Social Security, through either privatization or some method of investing a portion of it in the equity markets, have pointed to the historically higher returns of stocks over bonds. Stocks over time have returned about 7 percent annually after inflation, while bonds have yielded about half that. But stocks are generally considered more risky investments than bonds, though in any given period each can prove quite volatile.
Economists and market watchers, however, said it was too early to say yesterday how much of a market boost Clinton's plan would provide, as many details remained unclear and the whole proposal could be radically changed or rejected by Republicans and Democrats in Congress.
"Who's going to manage the money?" asked Ken Safian, a money manager based in White Plains, N.Y. "There are a lot of questions to ask."
Diverting so much money into the equity markets likely would drive up stock prices, experts said, providing a continued and new source of investment to the market.
But it could have the opposite effect on bonds, as the federal government likely would have to pay higher rates than otherwise would be the case to entice private investors to buy Treasuries. Using a portion of the surplus to buy stocks rather than paying down the national debt means the government will have to sell more bonds to the public, raising interest rates and driving down bond prices.
"We're making a national asset-allocation call," said Jim Griffin, an economic strategist with Aeltus Investments in Hartford.
Federal Reserve Chairman Alan Greenspan has warned that shifting among asset classes within the Social Security system could have unintended consequences. He has said such movement may be a zero-sum game, in that the higher returns in the stock market may be offset by higher interest costs.
"All of it is moving bonds from the public sector to the private sector," said Jeremy Siegel, a professor of finance at the Wharton School at the University of Pennsylvania. "That's no magic way to create wealth."
Griffin questioned the wisdom of pouring government funds into the stock market at a time when it hardly needs any more stimulus. He said it may be wiser for the government to save the surplus.
"What do you do when the sun is shining?" Griffin said, "You save for a rainy day."
Others wondered whether individuals would compensate for the increased risk of a retirement portfolio with a higher percentage of equity investments by seeking out other less risky assets, such as bank certificates of deposit or bonds.
"You may get higher returns" in stocks, said Merrill Lynch & Co. market strategist Richard Bernstein. "But will somebody out there reallocate their assets?"
Safian said the debate over Social Security could amount to a change in national economic policy away from one of a tight fiscal policy and accommodative monetary policy, which would have a profound effect on the stock market. Stocks have prospered in the past decade in an environment of low interest rates and, more recently, with the backdrop of a growing federal budget surplus.
Any change in that scenario, whether intended or accidental as a result of changes in policy that produce other offsetting effects, could undermine the bullish era for stocks, Safian cautioned.
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