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Commentary: Social Security Will Play the Market
Nearly two years ago, President Clinton proposed investing a chunk of the Social Security fund in corporate stocks and bonds. It was about as popular as his universal health-care plan. Democrats and Republicans hooted it down. Federal Reserve Chairman Alan Greenspan called it "very dangerous."
And the catcalls have only gotten louder. GOP Presidential candidate George W. Bush, who wants to let Americans invest directly in the markets through their own private Social Security accounts, vehemently opposes government purchases of corporate securities. Stanford economist Michael Boskin, a top Bush adviser, calls it "one of the worst ideas I have ever heard." Al Gore is against it, too. Because markets are risky, it "would undermine America's trust in the trust fund and take the `security' out of Social Security," the Veep said in a June 20 speech.
There's just one problem. If government forecasts of annual budget surpluses are correct, Washington will have no choice. Like it or not, Social Security funds will have to be invested in private markets simply because there will soon be no other place to put them. "We will be faced with an unavoidable circumstance," says former Congressional Budget Office director Robert D. Reischauer. "One [will have] to invest in securities other than those guaranteed by the federal government."ALL OPPOSED? And it is going to happen no matter which candidate becomes President or whose economic agenda is in place. Even under the projections of both Gore and Bush, Washington would be investing Social Security assets in stocks and bonds within 15 years. Neither will concede that, because it complicates their debate over Social Security. But by claiming they are dead-set against such investment, both candidates are misleading voters.
Here's what is really happening: Today, Social Security is collecting about $200 billion a year more in payroll taxes than it pays in benefits. It is required by law to invest that surplus in special nonmarketable Treasury bonds. As long as the government was running deficits, there were plenty of Treasuries to buy. But now Washington expects huge surpluses in both its Social Security and non-Social Security accounts for years to come. So all it can do with that excess cash is buy back the $3.5 trillion in outstanding public debt. As a result, those bonds will disappear sometime around 2015.
Under Gore's fiscal agenda, government would have to confront the problem even sooner, since he vows to wipe out the public debt by 2012. Bush wouldn't slow the inexorable march of the surplus by much: He'd pay off the debt by 2016. John Cogan, a Social Security expert who advises the Bush campaign, says George W. "absolutely" would not invest government funds in the market but concedes that "if he were President in 2016, he would have to confront this issue." And a strong economy could allow Washington to pay the debt off still faster. "At the rate we're going, we're going to eliminate all of the [public] debt in seven years," predicts Wayne D. Angell, chief economist at Bear, Stearns & Co. and a former Fed governor.
Then, there will be no government bonds to buy. But Social Security will be running annual surpluses until roughly 2025. Indeed, Social Security estimates that from 2015 to 2025, it will generate $2.2 trillion in excess income. The only place it can go: the markets.
Of course, there are ways around the problem--spend more, slash income taxes, or reduce payroll taxes. But economists such as Reischauer and the Brookings Institution's Barry Bosworth argue that instead of slowing the pace of debt reduction, Washington should start planning for the inevitable. They say Social Security should begin investing long before Treasury runs out of bonds.
Supporters of that idea concede that direct government investment in corporate securities raises delicate questions. Among them: how to keep politics out of both investment decisions and corporate governance. After all, if Uncle Sam becomes a big shareholder in, say, Ford Motor Co. (F), he might want to say something about what kind of tires Ford puts on its Explorers.
These problems could be avoided by creating an independent board that, in turn, would hire private investment advisers to build a portfolio, much as corporate pension funds do today. It could also remove politics from investment decisions by purchasing broad market indexes, nonvoting shares, or corporate bonds."ABSURD." Still, critics insist that there are more fundamental problems, including Gore's fear that buying corporate securities would add an unacceptable element of risk to the retirement program. Brookings' Bosworth, who serves as a technical adviser to the Social Security system, disagrees. "It is absurdly risk-free," he says. "No private investor in his right mind would be so carried away with avoiding risk that they would concentrate all their investments in Treasuries."
These are tough issues. Canada is wrestling with them as it begins investing assets in private markets. States have struggled with ways to invest their public-employee retirement funds.
Gore and Bush, however, have another solution: They just want to pretend this problem doesn't exist. But it does, and voters would be better served if they told us what they plan to do about it.By Howard Gleckman and Rich Miller; Gleckman and Miller Cover Economic Policy from Washington.