Social Security Plan Faces A Lot of Tough Questions
By BOB DAVIS, GREG HITT and GREG IP
Staff Reporters of THE WALL STREET JOURNAL
WASHINGTON -- President Clinton made a bold opening bid in the
Social Security debate, proposing to invest hundreds of billions of taxpayer
dollars in the stock market and to create government-sponsored,
401(k)-type individual savings plans for taxpayers.
"We must help all Americans, from their first day on the job, to save, to
invest, to create wealth," the president said during his State of the Union
address Tuesday night.
The plan, offered in the face of a
congressional effort to remove the president
from office, drew immediate and harsh
criticism from congressional Republicans. But
by agreeing to channel Social Security funds
into the stock market and advocating
individual savings accounts, the president
advanced a debate that promises to be one of
the most provocative of 1999.
For Wall Street, the stakes are huge. The
Clinton plan and some congressional
alternatives would channel between $650
billion and $1.2 trillion of taxpayer dollars into
stocks over the next 15 years. At the end of
that time, White House officials said, the
government would own 4% of the entire U.S.
market. A number of Republican alternatives
would channel as much money into the stock
market, but would do it through individual accounts.
The amounts being talked about are large but not overwhelming. An
investment of $650 billion over 15 years would equal about $3.6 billion in
new money a month. By comparison, individual investors have put $1.1
trillion into the stock market since 1991 through mutual funds, or about
$11.5 billion a month, according to the Investment Company Institute.
Since 1996, those mutual-fund inflows have averaged $17.1 billion a
month.
Still, Social Security funds would no doubt be a reliable source of demand,
in contrast to mutual-fund flows, which fluctuate with the market's fortunes
and other factors. The added flow from the Social Security system would
be sure to, "at the margin, keep a relatively high floor under stock prices,"
said Christine Callies, chief investment strategist at Credit Suisse First
Boston.
Already, rumblings about administration plans for a Social Security
overhaul "may have contributed to the stock market's euphoria" in early
January, said Bear Stearns Cos. investment strategist Elizabeth Mackay in
a report. And stocks could be pushed higher, she said, if such a plan
appeared likely to be adopted.
Before Wall Street sees any government investment, the administration
must work out a deal with a skeptical Congress. Republicans were quick
to blast the president's proposal as big government at its worst. "No. No.
A thousand times, no," said House Ways and Means Chairman Bill Archer
of Texas, in a statement swiftly issued after details of Mr. Clinton's
proposal began to leak Tuesday morning. "If you thought a government
takeover of health care was bad, just wait until the government becomes
an owner of America's private-sector companies," he said.
Mr. Archer's comments underscored differences between Mr. Clinton's
plan and those favored by congressional Republicans. The president would
leave the existing Social Security system largely intact and simply have the
government invest part of Social Security Trust Fund surpluses in the stock
market in order to enhance returns to the program. The individual savings
accounts would be in addition to the current Social Security system.
"The best way to keep Social Security a rock-solid guarantee is not to
make drastic cuts in benefits; not to raise payroll taxes; and not to drain
resources from Social Security in the name of saving it," the president said.
Many Republicans see individual savings accounts as a replacement, at
least in part, for the existing system. Layering such accounts on top of the
existing system, some argue, would amount to creation of a new
entitlement system.
Whether the sides can find common ground in a city overheated with
impeachment rhetoric is far from clear. But by endorsing the concept of
individual accounts and stock-market investments, Mr. Clinton has
essentially begun negotiations with Republicans and Democrats who favor
such ideas. Moreover, the same impeachment imperative that may have
driven him to use Social Security to show he was in control applies to
lawmakers who want to show they can do more than investigate the
president. Putting together a Social Security restructuring would further the
interests of both sides.
"I think the president outlines a framework under which the House and
Senate can move ahead. It's putting meat on the bones," said Democratic
Rep. Charles Stenholm of Texas, who sees individual accounts as a partial
replacement for Social Security. Rep. Stenholm was one of the few
Democrats to vote to impeach, but he says he hasn't "noticed any
unwillingness of the administration" to work with him on a Social Security
compromise.
Mr. Clinton's plan also demonstrates how prosperity has made shoring up
the Social Security fund much easier. With budget surpluses that the
administration projects will exceed $4 trillion over the next 15 years, Mr.
Clinton was able to put together a package with no cuts in retirement
benefits. "It will be hard to propose anything to compete with it," said John
Rother, legislative director for the American Association for Retired
Persons. "It will be attractive because it's relatively painless."
However some Republican strategists argued -- and some Democrats
quietly agreed -- that Mr. Clinton's no-pain plan shows that the president
is merely trying to forestall fundamental reform rather than advance it. "It's
another part of the shell game," said Republican pollster Bill McIntuff.
Added Ralph Reed, a GOP consultant aligned with the religious right: "He
had the opportunity to pull off the domestic equivalent of Nixon going to
China, and he punted."
Specifically, the president's plan would set aside about $2.8 trillion, or
62% of the projected budget surpluses over the next 15 years, to bolster
Social Security. Of that amount, the administration would invest $650
billion to $700 billion in stocks, in hopes of getting higher returns than
those on the Treasury debt in which Social Security funds now are
invested. The remainder of the $2.8 trillion would be invested in Treasury
securities.
Separately, about $500 billion would be spent to fund retirement accounts
controlled by individuals, which would be dubbed Universal Savings
Accounts and modeled after 401(k) retirement accounts. In an example a
White House official used, the government might provide $100 for every
worker and then match his or her subsequent contributions. Though it is
still sketchy on details, the administration wants to boost savings by
lower-income workers, and it would provide them with one-for-one
matching grants. Higher-income people would get a lower percentage
match, or none at all.
On the surface, the mathematics in favor of putting money into stocks seem
hard to criticize. Currently, all Social Security funds are required by law to
be invested in Treasury securities. But most major academic studies find
that over the very long run, stocks provide superior returns. Prof. Jeremy
Siegel of the Wharton School at the University of Pennsylvania has found
that since the early 19th century, stocks have provided, over very long
holding periods, after-inflation returns of about 7% a year. That compares
with between 2% and 3.5% for long-term government bonds, and
between zero and 3% for Treasury bills.
But stock returns are highly variable, and after a severe period of losses, it
can take a long time for investors to make their money back. "The thing is,
it could go down 50% in a couple years, and then what happens?" asked
Robert Shiller, an economics professor at Yale University. "If we have
fixed benefits, it will have to be the taxpayer who has to come up with the
money."
Within the Clinton administration, Treasury Secretary Robert Rubin has
made similar arguments. But the former Wall Streeter endorsed the Clinton
plan, in part because it would lead to investment of no more than 15% of
the entire Social Security Trust Fund in equities. "We came out in a
remarkably good place," Mr. Rubin said. "Equities have risks, and that is
too often underweighted in this market environment. We're at a point
where about 15% of the trust fund winds up in equities. That's a sensible,
prudent place to be."
White House aides say the money would be invested to match a popular
stock-market index, but handled by private money managers. An effort
would be made to keep administrative costs low. That would reduce the
opportunity for money managers to make big profits off the government
funds. But Wall Street firms are eyeing the proposals nonetheless. Henry
H. McVey, asset management and brokerage analyst at Morgan Stanley
Dean Witter & Co., said that retirement business, including 401(k) plans,
variable annuities and IRAs, is the fastest-growing part of the mutual-fund
industry, now making up about 35% of the industry's more than $5 trillion
in assets.
A key question is whether, even if some Social Security money is invested
in the stock market, the government or individuals should control those
investments. The administration wants the government to, for two reasons.
First, officials like Mr. Rubin fear that handing over a portion of Social
Security taxes to individual accounts would make the system too
vulnerable to market downturns. Second, many of President Clinton's
liberal supporters fervently oppose any move that would use existing
payroll taxes to fund individual accounts. They fear that this would be the
beginning of a movement to "privatize" Social Security, and thus undercut
its function as a safety net for society's less fortunate.
Conservatives, on the other hand, are distrustful of any scheme that lets the
government decide how such a big pot of money is invested, fearing that
this would be a form of backdoor socialism. They worry that the federal
government would use its position as shareholder to press for corporate
actions that it believes support its policies. In the past, state and local
pension funds have used their financial muscle to press companies not to
invest in apartheid-ruled South Africa, for example.
In addition, with Social Security funds invested in stock, the federal
government could come under strong political pressure to support the
stock market in times of turmoil, as Hong Kong's government did during
the Asian financial trouble last year.
Conservative Republicans also favor individual accounts for the same
reason many liberals oppose them -- they could be a step toward
privatizing Social Security.
While the administration will highlight Mr. Rubin's support, Republicans are
likely to get support from the nation's other top economic policy maker,
Federal Reserve Chairman Alan Greenspan. In testimony last year, he
called government investing "very dangerous" because of the difficulty of
insulating it from political meddling. "I know there are those who have
beliefs that it can be insulated from the political process. And they go a
long way to try to do that. I have been around long enough to realize that's
just not credible and possible," he said.
Mr. Greenspan is likely to be asked to expand on his views when he
testifies Wednesday at the House Ways and Means Committee.
The president's proposal for individual accounts is more popular with his
Capitol Hill critics, mostly because it apes proposals from prominent
Republicans. The accounts the president envisions are similar in concept to
proposals advanced by House Budget Chairman John Kasich, an Ohio
Republican, and Senate Finance Chairman William Roth. Even House
Majority Leader Richard Armey, the conservative Texas Republican,
offered praise for the president. "There is a bipartisan commitment in
Congress that real Social Security reform must create more IRAs, not
IOUs," he said. "The president seems ready to join us on that principle."
The "USA" accounts would provide a mix of government and private
funds. In one example used by the administration, workers who make
$45,000 would get a $100 initial payment, plus a 50% government match
of their contributions up to a maximum of $600. The result would be
$1,000 individual accounts, with the government providing $400.
Investment options would be limited. Officials said the plan might initially
be similar to the government's pension program, which allows investments
in a stock index fund, a bond fund, and a mixed fund.
The proposal is bound to attract its share of critics who believe that
separated from Social Security, the individual accounts would merely
become an entitlement program. Many Republicans would prefer to use
the portion of surpluses not devoted to Social Security to give taxpayers a
straight tax cut.
Mr. Clinton also offered another goody to retirees: a promise to back
Republicans' longstanding effort to lift penalties on wages that retirees
under age 70 can earn. Currently, a retiree between 65 and 69 can earn
$15,500 a year without losing any benefits; for a retiree earning more than
that, the government withholds $1 for every $3 in wages. Retirees under
65 face stricter rules. This "earnings test," the White House said Tuesday,
"primarily serves to confuse people and to discourage them from working."
With the bitterness of the impeachment proceedings coloring relations
between Democrats and Republicans, both sides looked to the president's
Social Security plan as a way to show they could work together. "My
guess is we will pass something this year," said Rep. Martin Frost of
Texas, the third-ranking Democrat. He said the two parties -- separated
by just six votes in the House -- have a vested interest in compromise.
That view was echoed by Senate Majority Leader Trent Lott, a
Mississippi Republican, even though he took a dim view of Mr. Clinton's
plan to have the government invest Social Security funds. "No matter what
he proposes, we need to work together," Sen. Lott said. "We have an
opportunity. We have a window to do this." |
