Social Security: And Now For The Liberal Fix

A Democratic plan would have the government invest in stocks

For months, Capitol Hill liberals watched in silent horror, convinced the crown jewel of the New Deal was at risk. Congressional Republicans--and even some influential Democrats, such as Senator. Daniel P. Moynihan (D-N.Y.)--argue that Social Security can best be shored up by letting workers invest part of their payroll taxes directly in the stock market. As polls showed the public warming to the idea, liberals were still on the sidelines.

But not for much longer. Hill Demo-crats will soon roll out plans that would let Social Security tap into the stock market's healthy returns without putting individuals at risk in bear markets. Senator Edward M. Kennedy (D-Mass.) is considering legislation to let the government invest up to half of Social Security's surpluses in the market. A similar measure that Representative Earl Pomeroy (D-N.D.) will soon unveil could become the official plan of the House Democrats.

Backers figure that switching the trust fund--now invested just in Treasury securities--to a blend of stocks and bonds could close nearly half of Social Security's projected long-term deficit. The plan would protect individuals from market risks--and head off a wholesale replacement of Social Security with a system of private investment. "We're trying to slow down the runaway privatization freight train," says Representative Jerrold Nadler (D-N.Y.).

But business isn't eager to see Uncle Sam take a direct stake in Corporate America--up to $2 trillion by 2020. "You could be socializing the private sector," frets Martin A. Regalia, chief economist of the U.S. Chamber of Commerce.

Liberals think they can defuse that concern by following a model laid out by Brookings Institution economist Henry Aaron. His plan would establish a new Social Security Reserve Board to direct the surplus toward a dozen or more large money-management or mutual-fund firms. The managers would be ordered to build portfolios that track such stock indices as the S&P 500. As pension-fund managers, they'd be required to vote the shares they buy only in the best interests of Social Security's beneficiaries. Aaron says his scheme is "triple-insulated" to avoid politically driven investments.

The plan would give a big boost to the mutual-fund industry, but not as much as the outright privatization favored by many Republicans. While Social Security might pay its money managers up to $7 billion a year, that 0.35% rate is about one-third of what fund companies would be able to charge individuals.

DOWNER? There is another issue: Direct investment may not offer the payoff sponsors expect. Federal Reserve Chairman Alan Greenspan has warned that redirecting the trust fund is likely to drive down share prices and boost bond returns--and the results could be a wash.

But the left's resurrection is welcome news to those Clinton Administration officials who, like Treasury Secretary Robert E. Rubin, are skeptical about private accounts. What looked like a romp toward privatization may turn out to be a debate after all.

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