President Clinton wants to invest nearly $700
billion in Social Security reserves in stocks, but market watchers
believe the ambitious plan will face too many political obstacles
to have much impact on the long-running bull market.
|Clinton did not disclose details of his plan, which
faces Republican opposition
And objections to the plan raised today by Federal Reserve
Chairman Alan Greenspan could make it that much harder for the idea
to become a reality.
Clinton's proposal, unveiled Tuesday in his State of the Union
address, must conquer worries about the wisdom of investing
Americans' retirement money in potentially volatile stocks
especially amid persistent fears that stock prices may already be
"Ultimately, I think it happens but I think it happens with
such a small sliver of the Social Security pie that it will not
have a noteworthy effect on stocks in the near term," said Charles
Crane, chief market strategist at Key Asset Management.
Clinton proposed using more than $2.7 trillion in expected
budget surpluses over the next 15 years or 62 percent of the
total to directly bolster Social Security's cash reserves. Of
that, nearly $700 billion would be invested in the stock market by
an independent government board in hopes of gaining higher returns.
The rest would be kept, as they are now, in safer but
historically lower-yielding U.S. Treasury bonds.
But Greenspan, arguably the country's most influential monetary
official, told the House Ways and Means Committee today he was
concerned that investment decisions for Social Security would be
influenced by political pressures.
Moreover, he said, the plan is bad for the economy. Social
Security purchases of stocks would channel trillions of dollars
over the years into U.S. companies; that would allow some
industries to become less efficient because government action, and
not market forces, are deciding which companies should be funded.
"I am fearful that we would use those assets in a way that
would create a lower rate of return for Social Security recipients
and even greater concern it would create sub-optimal use of capital
and a lower standard of living," Greenspan said.
Also standing in the proposal's path are Republicans who oppose
government participation in private financial markets, preferring
to see Social Security money diverted into personal accounts.
Clinton is siding with Democrats who say that would expose
Americans to too much financial risk.
"So far the market regards this possible outcome with keen
interest, but without tremendous conviction," said Tom Madden,
chief investment officer for domestic equities at Federated
Investors. "Given the president's current difficulties and the
entire focus of the Congress on the impeachment trial, how fast
such an initiative could go forward is an open question."
Fears also remain that stocks have climbed too fast and are too
risky. Indeed, blue-chip stocks managed only a slight gain Tuesday
as investors reacted to warnings from the Fed chairman that the
market may be too optimistic about corporate profits.
Some analysts pointed out the appeal of the current system: it's
"People are probably scratching their heads and saying the
Social Security system ... is missing out on great investment
opportunities by not having been in the market in the last eight
years. But widows and orphans also haven't lost money either at any
point," said Arthur Hogan, chief market analyst at Jeffries & Co.
"It's very difficult to explain to people: 'You lost money, you
lost part of your Social Security, because we made bad investment
decisions,"' Hogan said. "That can't happen in the boring old
bonds that they're invested in now."
Clinton also proposed that another 11 percent of the total
surplus, about $500 billion, would go to subsidize new accounts to
supplement Social Security benefits that would be similar to the
401(k) plans many companies offer.
The Clinton plan promises to pour millions more into the market,
but the more significant impact may be psychological, said Robbins.
"It adds a little more credibility to the stock market and may
cause people to separately move more money from relatively
low-return investments and realize that long-term stocks are the
place to be," he said.