Greenspan Sees Harm in Proposal

By: David E. Rosenbaum
The New York Times, January 21, 1999

WASHINGTON -- Republicans in Congress and Alan Greenspan, the chairman of the Federal Reserve Board, said Wednesday that President Clinton's proposal to have the Government invest a portion of Social Security reserves in the stock market would endanger the economy.

But while some influential Republicans said the plan proposed by Clinton in his State of the Union Message on Tuesday night was so off base that it left no room for compromise, many others saw the proposal as an opening bid that could lead to fruitful negotiations.

In testimony before the House Ways and Means Committee Wednesday, Greenspan, whose views on economic matters carry considerable weight in Congress and on Wall Street, said he supported the President's notion of putting almost two-thirds of the Federal budget surpluses over the next 15 years into Social Security reserves.

But Greenspan added that the idea of having the Government invest part of the money in the stock market could threaten the economy.

The most pessimistic of the top lawmakers interviewed today was Senator Phil Gramm of Texas, a Republican who is one of the foremost authorities in Congress on Social Security. "I was profoundly disappointed in what the President proposed," Gramm said.

He said he feared that "the whole thing is dead for this Congress" and that "we may have to wait for a new President to take office" before the long-term financial problems with Social Security could be resolved.

Asked about that view, Representative Bill Archer, the Texas Republican who is chairman of the Ways and Means Committee, replied, "I'm not that pessimistic."

"I think the President's opening shot ducks out on facing up to the real issues," said Archer, whose committee will have first crack in Congress at writing a new law, "but I'm not sure this is his final shot."

Under Clinton's plan to address the potential insolvency of the retirement system when the baby boom generation begins to retire, 62 percent of the projected surpluses in the Federal budget over the next 15 years -- about $2.7 trillion out of total surpluses of about $4.4 trillion -- would be used to bolster Social Security.

The Clinton Administration calculates that this would extend solvency to 2055 from 2032, protecting almost everyone who is now working.

Most of the money allocated to Social Security would be used to pay off the Government's debt. Economists believe that lowering the debt, now about $5.5 trillion, would reduce interest rates, generate private investment and stimulate economic growth, all of which would make it easier for the children of baby boomers to pay the Social Security taxes for their parents' retirement benefits.

But the President would invest $700 billion of the $2.7 trillion in the stock market, which over the long term has historically produced substantially higher returns than Government bonds, where the Social Security reserves are now placed.

The White House says these higher returns would extend Social Security solvency for an extra five years, to 2055 instead of 2050.

Administration officials insist that care would taken to make sure the investments were insulated from politics.

But Greenspan and Republicans in Congress are skeptical of Government participation in the private financial markets, and this is where they take strongest issue with Clinton's proposal.

Greenspan, for example, said he supported the idea of using most of the surplus to shore up Social Security reserves. But as for the Federal Government's investment in the stock market, he said, "I do not believe that it is politically feasible to insulate such huge funds from government direction."

Political pressures, Greenspan said, could lead to inefficient investments that, in turn, would result in a lower rate of return for retired people and a lower standard of living for all Americans.

Many Republicans took a similar stand. "It amounts to nationalization of American industry," said Representative Jim Kolbe of Arizona. "It's scary. They haven't thought it through."

Republicans, almost without exception, favor investing retirement money in financial markets, but they would have workers invest the money themselves in their own private accounts rather than having the investments placed by the Government.

The President, with the support of most Democrats in Congress, believes that such individual investments could result in unsophisticated workers' risking their retirement savings.

Outside of Social Security, Clinton proposed spending about $500 billion over the next 15 years to subsidize workers who established investment accounts that would work like the 401(k) plans that many workers have. Republicans objected to this on the ground that it would create a new government entitlement program.

Republicans are not united behind any particular plan. Some, like Kolbe, would allow workers voluntarily to invest part of their payroll taxes. Their guaranteed Social Security benefits would be reduced accordingly.

Other Republicans would maintain the current Social Security tax and benefit structure but would give workers an income tax cut if they invested the money for their retirement.

This would ultimately cause the Federal deficit to rise again if taxes were not raised or the Government's spending reduced.

Representative E. Clay Shaw Jr. of Florida, the new chairman of the Social Security Subcommittee in the Ways and Means Committee, said he was optimistic that a compromise could be reached.

"The President has opened the door toward investing in the private sector," Shaw said. "Republicans don't support the idea of the Government doing the investing, but it's a good thing the President has opened the dialogue."

Senator Judd Gregg, Republican of New Hampshire, calculated the odds of finding a consensus at 20 to 1. But before Clinton's speech, the Senator said, he would have set the odds at 200 to 1.

Archer, the Ways and Means Committee chairman, is retiring at the end of this Congress, and he said that like the President, he would like to leave a solvent Social Security system as a legacy of his years in politics.

"I really do want to work something out and get this solved during the last two years for Clinton and me," Archer said. Then, referring to the impeachment trial, he added, "Assuming he goes on for another two years."


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