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Clinton's Investment Plan--Shrewd or Socialist?

Debate: Economists are far apart over his proposal to put Social Security money in the stock market.


NEW YORK — In the two weeks since President Clinton first proposed investing Social Security funds in the stock market, any hope that a consensus opinion might emerge from the nation's normally genteel economic fraternity seems all but lost.

Opponents, led by Federal Reserve Chairman Alan Greenspan, have burst forth to claim that the idea would lead to well-intentioned bureaucratic meddling in markets at best, and outright socialism at worst.

Supporters--eyeing the bonanza that Wall Street's historic bull market has been for investors--champion the plan as a way to bring more Americans into that party while addressing the undeniable long-term funding shortfall facing Social Security.

Yet many of the questions being raised are, for the most part, answerable only on a theoretical level: Does the government, by owning stocks, take those earnings away from private investors? Or by contributing more capital to free enterprise, does the government increase the long-term wealth creation potential of society? Economists can't agree.

The Clinton plan itself is, so far, lacking all but the barest details: To rescue Social Security from being bankrupted by the retirement of the baby boomers beginning 15 or so years from now, Clinton proposes earmarking nearly two-thirds of the projected federal budget surplus through 2015 for the Social Security trust fund.

Of this sum, 25%--an estimated $700 billion over 15 years--would be invested in the stock market.

Clinton also proposes a new class of retirement funds for lower-income Americans. The government would contribute matching funds as an incentive for people to save more for retirement. Potentially, hundreds of billions of dollars of this money also could go into the stock market.

Putting aside the major question of whether the federal budget will even achieve the surplus totals that Clinton projects, economists seem to agree that the sheer size of the proposed investment wouldn't be enough to swamp the stock market. Even if it all were invested at once, it would come to less than 10% of the nearly $12-trillion total value of U.S. stocks.

State and local pension funds, by contrast, already hold $1.12 trillion of stocks, according to consulting firm Greenwich Associates. Yet there is no debate over whether that has somehow compromised the U.S. capitalist system.

No, it isn't the size of the investment; it's the identity of the investor that raises the hackles of most opponents of the Clinton plan.

Heading the list is Greenspan, who reiterated Thursday before a Senate committee his view that it would be impossible to insulate the Social Security fund from political pressure "to allocate capital to less than its most productive use."

What the Fed chief had in mind are regulations--fairly common among public pension funds--that either "target" investments into areas such as low-income housing or that ban investments in companies that sell tobacco, for example.

Because of such rules, Greenspan said, public funds tend to have lower average returns than private ones--even assuming a large investment in stocks. "There is evidence that suggests that the greater the proportion of trustees who are political appointees, the lower the rate of return," the Fed chief added.

According to the Cato Institute, a Washington think tank that favors privatizing Social Security, 42% of public pension plans have targeted investments and 25% have investment restrictions.

A Texas school board, in one extreme example, ordered the divestiture of Walt Disney Co. stock in its teachers' pension fund as a protest against certain movies made by a Disney film unit, said Cato executive Michael Tanner. He cited a 1995 study showing that the average returns of plans with such restrictions were 2 percentage points lower than those of unfettered plans.

To Greenspan, as laudable as any social goals might be, it is a mortal sin, economically speaking, to put any investment objective above seeking the highest free-market return at a given level of risk.

Interfering with that process means jeopardizing the development of new technologies and services--the very basis of our standard of living, he said.

But former Clinton Labor Secretary Robert B. Reich, now an economics professor at Brandeis University, said Greenspan should know better than to say it is impossible to insulate a federal institution from political interference. Indeed, the Federal Reserve itself is a counter example.

Under the Clinton plan, direct investment decisions would be made not by government officials but by 10 or so private money management firms hired in open bidding.

Because of the size of the funds, most of the money probably would be managed "passively"--that is, invested in index funds that attempt to mirror the performance of such market barometers as the Standard & Poor's 500-stock index.

"Investing in index funds creates a second firewall" against political meddling, Reich said.

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