Greenspan Repeats Warning

Federal Reserve Chairman Alan Greenspan repeated his warning Wednesday against investing Social Security funds in the stock market.

In testimony before the House Commerce Committee's finance subcommittee, Greenspan said investing government money in the stock market would not increase national savings or productivity.

"Investing Social Security assets in equities is, then, largely a zero-sum game," Greenspan said.

The plan to invest portions of the Social Security trust fund in the stock markets is the centerpiece behind President Clinton's proposal to reform the retirement system to accommodate the retirement of the Baby Boom generation. Social Security funds are currently invested in special government bonds.

Deputy Treasury Secretary Lawrence Summers backed Clinton's plan in appearances before the subcommittee and the House Ways and Means Committee.

Greenspan repeated a warning he gave earlier this year that government investments could not be isolated from political pressures. But his broader point is that changing the form of government investments would do nothing to improve society's overall return or ability to care for its elderly people.

Summers said structures could easily be established to insulate Social Security investments from political interference. He said the national savings rate would be boosted by paying down the debt and by giving individual workers matching funds for their private accounts.

Investing government funds in stocks would amount to a great swap of publicly held bonds for privately held stock, the Fed chairman said. To get private investors to buy those bonds, "it seems likely that a rise in the interest rate paid on Treasuries, and perhaps an increase in equity prices and a reduction in the future return on equity, would be necessary," Greenspan said.

This transfer would create great risks, he said. "Large investments in equities by the Social Security Trust Funds could impair ... efficient market pricing," he said.

"What would have been gained by such a huge shuffling of funds?" he asked. "The transfer ... would not, in itself, have any effect on national saving."

Greenspan said that if additional money is needed to fully fund Social Security, it should be provided directly by increasing payroll taxes or by using general revenues. Fully funding retirement would probably be easier if done in the private sector than in the public sector, Greenspan said.

Republicans have pushed the idea of diverting some of the money that now goes into Social Security into individual accounts that could be invested in stocks, bonds or other investments. The White House believes individual accounts would be costly to administer and would destroy the safety net of Social Security. In an individual account system, retirees would be exposed to poor investments and market cycles.

In effect, going to individual accounts would take both the "social" and th "security" out of the program.

Despite the differences over where to invest the trust funds, there seems to be a growing consensus in Washington that most, if not all, of the projected budget surpluses should be dedicated to Social Security.

Republicans moved Tuesday to rush a bill through Congress to wall off Social Security from the rest of the budget in an effort to get ahead of President Clinton on the issue. Clinton plans a big rally for congressional Democrats at the Library of Congress to push his legislative agenda, which includes setting aside 77 percent of the surplus for Social Security and Medicare.

In practice, this means paying down the debt. Clinton has said that, under his plan, interest payments would fall to 2 percent of government spending from about 15 percent now. Less government borrowing would lower interest rates throughout the economy, which could stimulate enough growth to pay for the boomers' retirement.

"This is a major step in the right direction," Greenspan said of plans to pay down the debt. "Whichever direction the Congress chooses to go, whether toward privatization or fuller funding of Social Security, augmenting our national savings rate has to be the main objective."

Written By Rex Nutting, Washington bureau chief for CBS MarketWatch