Greenspan Assails Clinton’s Social Security Reform Plan

Less than 24 hours after President Clinton proposed that the federal government invest Social Security funds on Wall Street, Federal Reserve Chairman Alan Greenspan assailed the idea Wednesday as bad for retirees and for the nation’s overall standard of living.

Greenspan, who, as much as any government official, is viewed as a guardian of the nation’s financial health, also suggested that the government’s investors would be tempted to use their capital for purposes other than maximum return on investments.

“I do not believe that it is politically feasible to insulate such huge funds from government direction,” Greenspan told the House Ways and Means Committee. Poorly chosen investments, he added, could not only lead to lower benefits for Social Security recipients but also could erode U.S. productivity, and prosperity, because of the inefficient use of precious investment capital.

“It gets down . . . to real standards of living,” Greenspan told the House Ways and Means Committee.

In his State of the Union address Tuesday night, Clinton broke with longtime tradition and suggested that a significant chunk of Social Security’s funds--about $700 billion over 15 years--be invested in the securities markets.

Clinton’s goal is to generate more money for the Social Security system, which now must invest exclusively in Treasury securities. Those securities have historically yielded about 3% a year after adjustment for inflation, compared with 7% for stocks.

Although this is not the first time Greenspan has criticized the notion of government investments to shore up Social Security, the timing of his comments was striking. The politically experienced chairman no doubt understood that his remarks would have considerable impact in Congress, which would have to approve any overhaul of Social Security.

Greenspan is not the only critic who argues that the government has no business buying shares of private companies.

“The problem we have is who controls the investment and who makes the asset decisions,” said Martin Regalia, chief economist for the U.S. Chamber of Commerce. “If your portfolio includes Microsoft and the Justice Department is prosecuting Microsoft in an antitrust case, doesn’t that give you a conflict of interest?”

Those who run the investments could be trapped between the desire to earn the maximum possible profits and the desire of a president or Congress to take certain stands on environmental, civil rights or other social issues, the critics say.

“We can save Social Security without making the government an owner of private markets,” House Ways and Means Committee Chairman Bill Archer (R-Texas) declared. “This proposal will lead to mischief, political favoritism and less money for Social Security recipients. It’s a very bad idea.”

Greenspan attacked the basic economics of Clinton’s proposal, arguing that investment funds managed by other governmental units typically return 2 or 3 percentage points less than private pension funds.

Other studies, he said, suggest that the more political appointees serve as pension fund trustees, “the lower the rate of return.”

The biggest pool of public investment capital in the nation today is the $133 billion controlled by the California Public Employees Retirement System, which manages the pension funds for more than a million active and retired workers. CalPERS has maintained the system’s independence but not without some struggle and conflict.

“It is so important for public pension trustees to be independent and to be insulated,” said James E. Burton, CalPERS’ chief executive officer. “The state of California is suing companies for tax claims, the same companies in which we invest. There is a legal and ethical wall. It is important for trustees of pension plans and even more important for public fund trustees to be independent.”

Although CalPERS is independent under California’s constitution, the state Legislature and then-Gov. Pete Wilson staged what amounted to a raid on the fund in 1991 to help with budget problems. The fund had a surplus because of its successful investments, and the governor and the Legislature decided to withhold a state contribution of more than $1 billion owed to the retirement fund that year.

The following year, California voters approved Prop. 162, which restated the independence of CalPERS, making future raids or interference illegal.

President Clinton thinks a tamper-proof investment system can be built at the national level as well.

“We want to work with members of Congress from both sides of the aisle to craft a bipartisan Social Security plan which invests a portion of the surplus . . . to achieve higher returns and includes a mechanism to ensure that investments are made independently and without political interference,” the White House said in a fact sheet.

A call for Social Security investment in equities has also been issued by economists Henry Aaron and Robert D. Reischauer of the Brookings Institution in their new book, “Countdown to Reform: The Great Social Security Debate.”

They argue that the dangers of political interference could be eliminated by giving control of the reserves to a new independent body: a Social Security Reserve Board modeled on the Federal Reserve Board. The Fed has been independent of Congress for 80 years in managing monetary policy, and the Social Security board could achieve the same degree of insulation, Aaron and Reischauer contend.

Many Republicans instead have proposed letting individual workers invest a share of their annual payroll taxes rather than turning them all over to the Social Security system. Democrats typically oppose this approach, which could expose some of every worker’s basic Social Security benefits to the vagaries of the stock market, as too risky.

* MEDICARE SOLVENCY: Critics doubt new funds will keep Medicare viable. A17

* EDUCATION AGENDA: Clinton’s plan underscores accountability in education. A17