- The Washington Times - Monday, August 21, 2000

Vice President Al Gore would have to rethink quickly his opposition to "risky schemes" that invest part of the burgeoning Social Security surplus in the stock market if he wins the presidency, Wall Street analysts say.
That is because in less than a decade, huge federal budget surpluses will leave the government awash in cash that will have to be put somewhere. The Treasury will have used the surplus to pay off most of the $3.5 trillion public debt. Treasury bonds will be virtually extinct and no longer available as a place to park the funds, the Congressional Budget Office and financial analysts say.
Mr. Gore regularly condemns Republican presidential candidate George W. Bush's proposal to let taxpayers put part of their Social Security payments in individual retirement accounts, which can be invested in the stock market.
"I have never supported plans that would steer the money you pay into Social Security into the stock market," Mr. Gore said in a June 20 campaign speech. "That would undermine America's trust in the trust fund, and take the 'security' out of Social Security."
But analysts say Mr. Bush's proposal is one of the only ways available to deal with Social Security's emerging dilemma: hundreds of billions of dollars in cash with no place to put it starting in 2007, according to the Congressional Budget Office.
"To say you're never going to change the investment of Social Security is wrong," said Ethan S. Harris, economist with Lehman Brothers in New York, attributing Mr. Gore's opposition to the typical "sloganeering" politicians engage in over Social Security without addressing financial reality.
"Ultimately, the U.S. government could be obliged to invest a large portion of its budget surpluses in private assets," including stocks as well as fixed-income securities other than Treasury bonds, he said.
Mr. Harris credits Mr. Bush for broaching the issue of partially privatizing Social Security with the public, though he finds fault with the Republican candidate's lack of details on how he would pay for about $1 trillion in transition costs to a newly configured Social Security program.
"Political support for such a plan is beginning to build," he said, bolstered by the public's current enthusiasm for the stock market and the widespread perception that returns there are consistently better than in other markets.
The "final push" that is likely to force Democrats such as Mr. Gore as well as Republicans to embrace partial privatization, he said, is the disappearance of Treasury bonds as the safe investment vehicle they have always been for Social Security funds.
The Treasury is on course to pay off or buy back all but about $1 trillion of the bonds held by private investors in 2007. Private analysts and the Congressional Budget Office say the debt can shrink no lower than that because pension funds, savings bond holders and central banks will be unable or unwilling to relinquish all their Treasury holdings.
At that point, the Treasury market "could become a rump market with virtually no trading activity," Mr. Harris said. "The enormous problems involved in shutting down the Treasury market" will force Congress to look for other ways to invest Social Security funds, he said.
By 2008, the only alternative to allowing taxpayers to invest some of their Social Security funds in the stock market would be to have the government do it on their behalf an alternative Mr. Harris said he prefers because it is not as "unwieldy" as managing 120 million taxpayer accounts.
But the alternative proposal is controversial as well. President Clinton last year proposed having the government invest Social Security funds in the stock market. But he withdrew the proposal this year after Federal Reserve Chairman Alan Greenspan and others spoke out against it.
Mr. Greenspan and many legislators fear the potential for political manipulation of any government agency entrusted with more than $2 trillion to invest. He testified that it would be virtually impossible to insulate the agency from politics and corruption, and questioned whether it was wise to have such a major government presence in the markets.
Mr. Gore so far has not resurrected Mr. Clinton's proposal. His blanket statements against investing Social Security in stocks would appear to rule out that approach.
Aides to Mr. Gore could not say how he would invest the Social Security surpluses after 2007.
The Congressional Budget Office assumes those surpluses will be put in unspecified "interest-bearing cash holdings." It estimates that such holdings will grow to an eye-popping $1.8 trillion, or 12 percent of the gross domestic product, by 2010.
"There is a need for a thorough debate on this issue now," said a Republican budget committee aide. "Many analysts are skeptical about the merits of having the government control such a large share of the economy."
Of course, the government could just spend the money, rather than invest it an alternative that many analysts say is more likely.
Republicans say that is what Mr. Gore and the Democrats would end up doing with the surpluses.
But Mr. Harris said it would take new spending programs as huge as the "Great Society" programs of the 1960s, including Medicare and Medicaid, to soak up the surpluses. He added that even a recession is unlikely to prevent the buildup of more cash than even big government spenders know how to spend.

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