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 tooth.

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 standards.

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 blasé 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."