Social Security Plan Envisions U.S. as Biggest Investor

As Congress and the Clinton Administration debate how best to secure Social Security's long-term viability, the answer increasingly seems to involve taking advantage of the potentially robust investment returns available on Wall Street. But while conservatives and some Democrats have been pushing plans that would allow individuals to invest some of their Social Security taxes in the financial markets, liberal Democrats, labor unions and other groups are rallying around proposals under which the Federal Government would invest some of the retirement system's reserves in stocks and bonds.

The idea of turning the Government into the world's largest investor -- with far-reaching effects on the markets -- is likely to be vigorously debated here on Monday, when President Clinton plays host to a forum and town meeting on Social Security. If it is not altered in some way, Social Security will run short of the money it needs to pay beneficiaries as the vast baby boom generation retires.

To proponents, making the Government a shareholder is a way to capture the power of the markets on behalf of Social Security recipients without exposing them directly to the risks or seeing the gains eaten up by the high costs of administering 150 million private accounts. Currently, Social Security's reserves are invested in safe but relatively low-yielding Treasury bonds. Moreover, proponents say, proposals built on having the Government invest up to half of Social Security's reserves on Wall Street would require fewer benefit cuts and other changes to the system than those built on diverting part of payroll taxes into private accounts.

"Investing as a system allows you to preserve current benefits, avoid raising the retirement age to 70 and deal with most of Social Security's solvency shortfall over the next 75 years," said Representative Earl Pomeroy of North Dakota, who is developing a Social Security proposal for House Democrats. "And who's better positioned to take the risk of a market downturn, the United States of America or an individual Social Security recipient?"

Mr. Pomeroy said that investing half of the system's reserves in an index fund that earned a 7 percent annual return on its investment -- the market averaged 7.56 percent from 1926 to 1996 and has done considerably better the last few years -- would take care of 95 percent of Social Security's financial problems, when combined with technical reductions in the Consumer Price Index being implemented by the Labor Department. The price index is used to set cost-of-living increases each year.

But advocates of private accounts said Government investment in the markets would be economically and politically unwise, if not treacherous or unworkable. One of the most influential opponents of Government investment is Alan Greenspan, the Federal Reserve chairman, who last week called the idea "very dangerous" and said it would inevitably lead to politicians interfering in the workings of free markets. "I don't know of any way you can essentially insulate Government decision-makers from having access to what will amount to very large investments in American private industry," Mr. Greenspan said. Implementing the idea, he said, "has very far-reaching potential dangers for a free American economy and a free American society."

Robert D. Reischauer, a fellow at the Brookings Institution, said Mr. Greenspan's concerns are legitimate, but that they could be addressed by establishing an independent investment board, appointed by the President and confirmed by the Senate, that would have a legal responsibility to seek the best possible returns for Social Security recipients. The board would hire professional investment managers who would invest the money to mimic as closely as possible the aggregate performance of all traded securities. "If I didn't think you could insulate the system from the risks of meddling, I'd be opposed, too," Mr. Reischauer said.

But opponents of Government investment said politicians would find some way around any safeguards. Consider, for example, the potential for political pressure to exclude tobacco companies from acceptable investments, or nonunion companies, or companies involved in some kind of wrongdoing. "The concept of the Government as owner is anathema to the way business is run and in fact the way the country is run," said Donald B. Marron, the chairman of Paine Webber, the brokerage firm. "Ownership confers certain rights and these rights should belong to the normal shareholder base."

Economists said any decision to have the Government invest hundreds of billions of dollars in the markets would have complex effects. To the degree that Social Security reserves were invested in stocks and corporate bonds instead of the Treasury securities they are invested in now, the Federal Government might have to pay higher interest rates on its debt -- ultimately costing taxpayers more.

The flood of Social Security money into the markets would also be a huge pool of new capital for American business, potentially helping stimulate the formation of companies. Or, economists said, it could create such a glut of capital that companies with little potential could get off the ground or unpromising technologies could soak up money, eventually harming the nation's overall economic health.