President Clinton's plan to extend Social Security's solency through 2055 preserves the existing benefit structure and rejects individual accounts. The plan relies primarily on placing most of the projected 15-year budget surplus into the Social Security trust fund. These aspects of the Clinton plan have been warmly welcomed by progressives who feared an imminent compromise that would have added individual accounts by diverting revenue from the current system. Partly to increase the projected rate of return, and partly to steal the privatizers' thunder, the President also proposed placing some $600 billion of the projected surplus into the stock market to earn a higher return. This part of the plan warrants a more wary reception.
Placing some of the trust fund in the stock market raises both phony issues and real ones. Let's dispatch the bogus ones first. For one thing, the amount of money the administration proposes placing in the stock market will never be a very large share of the trust fund or the stock market. At present, the trust fund holds approximately $800 billion in government bonds. Under existing law, this would increase to $3.35 trillion by 2015. With the additional amount that Clinton has proposed to add from general revenue, it should reach $6.25 trillion by 2015. The $600 billion to be placed in the stock market would be less than 10 percent of the system's total assets at that point. And the proposal calls for capping at 14.6 percent the portion of the trust fund held in stock. So only a limited portion of the trust fund would ever be placed at risk.
Currently the value of all publicly traded stock in the United States is approximately $13 trillion. If the stock market grows at the same pace as the economy over the next 15 years, it will rise to approximately $27 trillion by 2015. The $600 billion held by the trust fund would then be less than 2.5 percent of the stock market. This is real money, but far from controlling interest. By itself, that infusion should not significantly affect stock prices, though it might spur the "irrational exuberance" that appears to have been driving the market in recent years. In short, the survival of Social Security will not depend on the stock market, nor will the government take over corporate America through its stock purchases. (At the same time, a significant downturn in the stock market would produce a shortfall in the system's reserves. And the government would hold a large enough stake in the market that it could be a serious factor, should it choose to have a real impact on corporate policy.)
There are those who are concerned that placing money in the stock market will prevent federal dollars from going to public investment or other social needs. It is important to realize that under the President's proposal, the money placed in the trust fund will be treated in exactly the same manner as the money placed in the stock market. Both will be counted as expenditures.
Nor will putting money in the stock market, either through individual accounts or collectively, affect the national savings rate. There is no economic theory that suggests the economy would grow any faster as a result of having the money placed in the stock market.
Some critics, including Alan Greenspan, have contended that government is a poor picker of stocks, and that the returns from such government investments tend to be inferior to private returns. In fact, the government begins with one big advantage, in that middleman commissions would be far lower than those in private investments. A potential disadvantage is that government would be necessarily more risk-averse; and since risk tends to be correlated with reward (and also sometimes with catastrophic loss), one would expect government holdings to show not only less volatility but also a lower average rate of return. In fact, though the evidence on public pension funds is limited, it does not indicate that they will necessarily have poorer returns than private funds. …