Wall Street Not Exactly Bullish on
Plan to Aid Social Security
By: Gretchen Morgenson
The New York Times, January 20, 1999
The bull market in stocks, running hard for more than eight years now,
has already lived longer than any other in history. And if President
Clinton gets his way, the gallop will continue.
The President's plan to shore up Social Security calls for putting $700
billion into the stock market. His idea is to transfer almost two-thirds
of the projected Federal budget surplus, roughly $2.7 trillion, to the
Social Security trust fund over the next 15 years and funnel $700 billion
of that into stocks.
Investors reacted tepidly to the proposal yesterday. But make no
mistake, the prospect of such a shift into stocks would be a powerful,
positive force on a bull market, which investors fret is long in the
The $700 billion earmarked for stocks is equal to roughly 5 percent of
the value of the entire United States stock market now. If this money went
into mutual funds whose holdings reflected well-known market averages,
like the Standard & Poor's 500-stock index, those shares might become
stock rockets. They are already valued exceedingly high by historical
Most Americans need not be sold on the merits of stock investing.
According to the Federal Reserve Board's most recent data, American
households own $5.3 trillion in corporate equities directly. This dwarfs
the holdings of mutual funds ($2 trillion) and that of state and local
government retirement funds ($1.3 trillion). Five consecutive years of at
least 20 percent returns in S.& P. 500 stocks have made even the most
cautious investor a believer.
Meanwhile, Social Security's returns have been woeful. On average, the
fund's investments have yielded 2 percent to 2.5 percent annually since
1937, a rate based on a composite of short-term and long-term interest
rates paid on a special, nonmarketed type of United States Treasury
security that matures in four years or more.
Still, investors were blasť following news of the President's plan
yesterday. The Dow Jones industrial average bounced back from a decline of
about 130 points earlier in the day to end 14.67 point higher.
Mr. Clinton's plan is likely to meet stiff opposition. Such issues as
how the government would manage its investments in private businesses loom
large. What a spectacle it would be if the Social Security fund had a
large position in the Microsoft Corporation as the Justice Department was
pursuing a vigorous antitrust case against it.
And how would the Government vote its beneficiaries' views on proxy
issues like mergers and acquisitions and chief executive compensation?
If the Government were to control a large portion of a company's
shares, what would happen when it came to sell? It would surely disrupt
the market in that company's shares. If the market fell, how would the
throngs of investors exist? Who would get to leave the party first?
"The market is correct in realizing how difficult the endgame is
going to be," said Charles Gabriel, a senior Washington analyst at
Prudential Securities. "I don't think it is inevitable at all."
Oddly, the idea of putting Social Security funds into equities has not
been the subject of furious lobbying in recent years. Merrill Lynch and
State Street Bank, two administrators of retirement accounts that stand to
benefit from a switch to equities, have pushed the idea somewhat.
But the Investment Company Institute, which represents the mutual fund
industry in Washington, has not favored putting Social Security assets in
stocks. "We will look closely at what the President is
proposing," said John Collins, the institute's spokesman. "We
will withhold our enthusiasm until we see the details."
Even though Wall Street firms would love to get their hands on $700
billion in social Security funds, American corporations may not be so sure
of the idea. "This would be a significant transfer of ownership from
the private sector to the Government," said Michael Tanner, director
of Health and Welfare Studies at the Cato Institute, a research
organization influential with conservatives.
Lawrence J. White, professor of economics at the Stern School of
Business at New York University, thinks funneling Social Security assets
into the stock market is a bad idea because the money will probably wind
up at the nation's largest public companies and therefore reduce funds
available for small businesses. As recently as the early 1990's, he said,
a third of Keogh retirement plans and individual retirement accounts were
invested in bank accounts or an equivalent account at an insurance
company. Much of this money was then lent to small businesses, the engine
of job growth.
"Where the money ultimately ends up is what concerns me," Mr.
White said. "I don't like it only ending up at the disposal of the
10,000 public companies."
Global Action on Aging
PO Box 20022, New York, NY 10025
Phone: +1 (212) 557-3163 - Fax: +1 (212) 557-3164
We welcome comments and suggestions about this site. Please
send us your name for our postal and electronic mailing lists.