January 7, 1997, New York Times
Analysis: Would U.S. Make Decisions Based on Investments
By DAVID E. SANGER
WASHINGTON -- Every week a president and Cabinet members make decisions, large and small, that move markets. Should the United States go to war against Saddam Hussein to protect Kuwait and maintain access to oil? Should it agree to a series of spending cuts that make a balanced budget within six years more likely? Should it agree to cut the capital gains tax?
Now, the recommendation that the country place a large part of the Social Security trust fund in the stock market, where it should be able to reap greater returns and avoid a revenue problem early in the next century, raises a host of questions about how such decisions of state might be affected. Under the most modest investment plan suggested on Monday by the Advisory Council on Social Security, a trillion dollars in government money could be placed in the stock market by 2015. Under the most aggressive plan, the figure would exceed $4 trillion.
Could any president -- or a Treasury secretary or Federal Reserve head -- ignore that fact in making decisions that could send the markets into the tank, imperiling the returns on funds in which, as the committee noted, "every American family would have a stake?"
That is only one of the many questions prompted by the conclusions of the Advisory Council, which was sharply divided on whether investing in the market was necessary to save the system -- and, if necessary, whether Social Security beneficiaries should be given broad powers to manage their individual accounts.
That would turn the system into something akin to a national 401(k) plan, the tax-deferred retirement accounts that millions of American workers now manage for themselves, with the savviest investors reaping the biggest rewards when they reach 65.
The lobbying will be fierce. Wall Street is ecstatic at the idea that billions upon billions of dollars that today are invested only in government securities might suddenly fuel the stock market. Its enthusiasm is hardly without self-interest. If fund managers are permitted to skim just 1 percent in management fees, it would mean new Wall Street revenues of $10 billion to $40 billion a year in 2015, and far more in the next century.
Labor unions say that it is not only risky to rely on volatile markets, but that it is also a surrender of the guarantees that the Social Security system has come to represent. And the American Association of Retired Persons, an increasingly formidable lobbying presence on Capitol Hill, declared on Monday, "There is no need to rush to radical reform."
But what of the conflict of interest inherent in any system that places the most influential single market force, the federal government, in the position of being the single largest investor? Some officials say the conflict of interest is more theoretical than real. After all, billions in state pension funds, and even some federal pension money, are already invested in the stock market.
And so is the future of any politician who can count electoral votes. Just ask President Clinton, who abandoned many of the promises of his first campaign when it became apparent that the markets were demanding fiscal discipline.
It was a risky strategy that, his aides said, paid off tremendously in November. "People dismissed Bob Dole's argument that the economy was in terrible shape," a top aide said, "because they knew that everyone was making money in the market."
But others around Clinton note that pouring Social Security money into the markets would turn what has for decades been a close interconnection between Washington and Wall Street into an iron link.
Market reactions, they say, are always a consideration in major government decisions. But they could loom over such decisions if the president, for example, was advised that the cost of sending troops to secure the peace on the Korean Peninsula might be a selloff that every American worker would see reflected on quarterly statements that spelled out the value of their "Personal Security Account."
"It's a serious question," an economist at Salomon Brothers, John Lipsky, said. "If you have the national government making decisions that will influence financial markets and if the government is directly involved in investing in those markets, it will undoubtedly affect decisions."
Clinton's top economic advisers agreed on Monday to say virtually nothing about the report.
The details of the report aside, there are some areas of broad agreement whenever Washington policymakers take up the electric issue of messing with Social Security. The first is that the system needs to be fixed. The only question is whether a small repair will do the job -- adjusting the consumer-price index, for example, to reflect the fact that inflation, and the Social Security benefits tied to inflation statistics, is overstated -- or whether a much bigger repair is needed.
The second agreement is that America needs to boost its savings and investment rates, which pale in comparison to the savings rate in Japan and many of the world's most dynamic economies. Forced investment would be a big step toward that goal.
But as soon as the subject turns to stock investment, the consensus falls apart. Treasury Secretary Robert Rubin, the former investment banker whose opinion counts most in the administration's internal debate on the subject, has said many times he has "substantial concerns" about putting the sole source of retirement income for much of America at the mercies of the stock market. White House officials say he has expressed that view in private in much stronger terms.
Rubin made his considerable fortune in a long career at Goldman Sachs & Co. and needs no tutorial on the arguments that make the investment strategy so appealing to those trying to repair the system. Today, the Social Security trust fund earns a rate of return of about 2.3 percent after inflation. Historically, the stock market has a rate of return of 7 percent. The difference, compounded over decades, is enormous.
But to some degree the national psychology is affected by the fact that the market has risen so dramatically, with only one major interruption, for 15 years. That psychology could be radically changed by a prolonged downturn. And if Social Security recipients were losing billions for several years, the pressure on the recipients of government bailouts would undoubtedly mount.
Some on the commission, including Thomas Jones, president of TIAA-CREF, which manages $180 billion in retirement money for professors and researchers, wonder whether the government or Social Security recipients should be put in that bind. "To me the bottom line is that half of America's workers have no other pension plan," Jones said on Monday. "Those are the people who absolutely need Social Security, with a guarantee. How reasonable is it to take away the guarantee, but say to them, 'You can make it up with investing acumen?' It's just not appropriate to put them at risk."
Copyright 1997 The New York Times Company