January 7, 1997, New York Times

Panel Advises U.S. to Invest Some Social Security Funds in Stock


WASHINGTON -- A federal advisory panel suggested Monday that the nation consider investing part of its Social Security revenues in the stock market to insure the solvency of the retirement program. But panel members disagreed on whether workers or the government should decide how the money is invested.

Seven of the 13 panel members recommended compulsory private savings through individual investment accounts. Labor unions said they would fiercely resist the use of such accounts to replace any part of the federal program.

Under current law, Social Security payroll taxes not needed for today's benefits are invested exclusively in government securities, mainly long-term bonds. In its final report, issued after more than two years of work, the advisory panel agreed that Social Security could obtain a much higher return by investing some of the money in stocks.

"Private investment is the key to bolstering the return on workers' very substantial tax payments," said Carolyn L. Weaver, a panel member who is an economist at the American Enterprise Institute. "Our proposal could produce larger retirement incomes for workers and boost national saving and economic growth."

But panel members disagreed over what level of financial risk was acceptable to workers and retirees. And they could not agree on whether workers should be allowed to choose the stocks and mutual funds in which their money would be invested.

In view of these disagreements, no major changes in Social Security are likely any time soon. But the panel's report sets the stage for a national debate on retirement policy.

Monday's report represents a possible turning point in the history of Social Security, which was created in 1935 and is the nation's biggest, most successful social insurance program. It could also prove a boon to Wall Street by funneling billions of dollars into stocks.

The panel, the Advisory Council on Social Security, was appointed in June 1994 by Donna Shalala, the secretary of Health and Human Services. She asked the members to take a long view of Social Security's financial health. The chairman of the panel was Edward Gramlich, a professor of economics at the University of Michigan.

As they completed their work, the 13 members of the panel were divided into groups of six, five and two. Each faction advanced its own plan to guarantee the solvency of Social Security over the next 75 years. Seven of the 13 members favored compulsory private savings through individual accounts, but they disagreed over whether workers should have limited or complete control over these accounts.

The six other members said that the government itself should consider investing part of the surplus in the Social Security trust fund -- up to 40 percent -- in stocks.

This group of six included three labor union officers and was led by Robert Ball, who worked at the Social Security Administration for more than three decades and was commissioner from 1962 to 1973.

The amount of money that would be injected into the stock market varied under the three plans. In 2015, for example, stock holdings would range from $1.2 trillion to $4.2 trillion. These totals, expressed in terms of today's purchasing power, range from $601 billion to $2.1 trillion.

Panel members estimated that these totals would be equivalent to 5 percent to 15 percent of the total market value of stocks. (By contrast, the assets of 401(k) plans quadrupled from 1984 to 1990, when they reached $385 billion, and they totaled $525 billion by the end of 1994.)

Ball said there was no need for radical change. "Social Security is not in the emergency room and does not require radical surgery," he said. "To maintain its long-term health, it requires only a series of moderate adjustments to revenues and expenses."

Clinton administration officials and senior Republicans in Congress, knowing that Social Security is an explosive issue among voters, reacted with utmost caution. They said that they wanted to study the proposals before taking action, and that action would not come for several years, at the earliest.

Administration officials and members of Congress said that Medicare, the health insurance program for the elderly, faced much more urgent financial problems. Its Hospital Insurance Trust Fund is expected to run out of money in 2001, assuming no change in current law.

Labor representatives were more vocal. Gerald Shea, a panel member who is assistant to the president of the AFL-CIO, denounced the proposals to replace part of Social Security with compulsory private savings that would be invested in stocks and bonds. He said that labor unions were organizing a campaign to "prevent these ideas of radical reform from getting beyond the fantasy stage."

Shea said that the proposals would "divert large amounts of money to Wall Street" and could be a boon for stockbrokers, mutual funds and investment advisers. Companies involved in financial services are already trying to whip up support for such proposals, he said.

Sylvester Schieber, a panel member who helped draft the proposal for personal savings accounts, said that financial service companies "did not influence our thinking."

Moreover, he said, "this is a highly competitive industry," and added that the competition among investment managers would prevent them from "reaping undue or exorbitant profits." Schieber is a vice president of Watson Wyatt Worldwide, a management consulting concern that specializes in employee benefits.

Proponents of personal savings accounts rejected the characterization of their proposal as radical. "There was a time," they said, "in the early 1930s, that Social Security was considered radical. We must get beyond such politically charged words."

Social Security pays monthly cash benefits to 44 million people: 31 million retirees, 7 million survivors and 6 million disabled people.

The first baby boomers will reach the age of 65 in 2011. The Social Security trust fund now has assets of more than $550 billion, and the surplus is expected to rise to $2.8 trillion in 2018. But then, the administration says, the assets will begin to decline, as the payments to retirees begin to exceed the revenues paid into the system by workers. By 2029, if the system is unchanged, the trust fund will be depleted, and revenues will cover only three-fourths of benefit costs.

Council members expressed surprising agreement on the importance of the annual cost-of-living adjustment, which is intended to preserve the purchasing power of Social Security benefits and offset the effects of inflation.

Benefits are now increased each year to reflect changes in the Consumer Price Index. The advisory council said that the cost-of-living adjustment could be reduced to reflect corrections that might be made in this index by the Federal Bureau of Labor Statistics.

But the panel said Congress should not dictate changes in the cost-of-living adjustment because such action would set "a bad precedent" that could be used to cut benefits unfairly.

A panel of five economists appointed by the Senate Finance Committee said last month that the index overstates the cost of living by 1.1 percentage points. Sen. Daniel Patrick Moynihan, D-N.Y., has said that Americans need not make immediate changes in the structure of Social Security if they agree to corrections in the cost-of-living adjustment.

Rep. Bill Archer, R-Texas, who supervises Social Security as chairman of the Ways and Means Committee, did not endorse any specific recommendation, but said he hoped that President Clinton would display "bold leadership."

Clinton's press secretary, Michael McCurry, offered a noncommittal response to the council's recommendations. At McCurry's regular briefing for journalists Monday, this exchange occurred:

Question: "What does the president think of investing some of the Social Security money in the stock market?"

Answer: "He believes that there are a number of ideas that have surfaced as part of this debate -- and certainly in the report of the advisory council itself -- that merit further discussion. He is not wedded to any of the suggestions made by any of the separate groups of members of the council itself, but agrees that many of these ideas will have to be discussed further and will have to be an element of the bipartisan process that would lead to resolution of questions about the future of Social Security."

Horace Deets, executive director of the American Association of Retired Persons, said: "Social Security is not in crisis. There is no reason to rush to radical reform proposals that would undermine the stability of the program."

Deets said that the proposals to channel a part of payroll taxes into individual investment accounts would be "especially risky for poor and middle-income elderly who rely on Social Security" as their main source of income.

These families, he said, "would have significantly less to invest than wealthy investors, would pay more in administrative fees and would be less able to protect themselves against downturns in the stock market."

Edith Fierst, a lawyer and member of the advisory council who specializes in women's pension rights, said: "Privatization is a threat to American women. The money accumulated in a personal savings account would belong to the person whose earnings were taxed, not to the spouse. Men are still earning more than women, so their accounts would be larger. If the man is not required to buy an annuity, he could take the money to Las Vegas or use it to support a girlfriend or buy a business."

Other Places of Interest on the Web

  • Report of the 1994-1996 Advisory Council on Social Security
  • Findings, Recommendations and Statements (88K)
  • Financial Data on the Plans (78K)
  • Background on the Advisory Council
  • Copyright 1997 The New York Times Company