CLINTON PLAN: TAKING STOCK

Pouring upwards of $650 billion from the Social Security trust fund into the stock market over the next 15 years — roughly $3.6 billion a month — would help stoke heated stock prices for another decade or more, right?

Not necessarily.

The Social Security trust fund would be buying fewer government bonds, which would force the Treasury to sell more in the open market — thus pushing up interest rates and leading to a drop in bond prices, many economists say. That could spur individual investors to buy bonds and to offload some of their stocks.

Moreover, some investors would want to diversify and minimize the risk of being overexposed to equities between their individual savings and Social Security, suggests Jeremy J. Siegel, a finance professor at the Wharton School of the University of Pennsylvania.

With the market already at stratospheric levels, Mr. Siegel predicts stocks could produce real, or after-inflation, returns of only between 5% and 7% over the next 15 or 20 years, even assuming Mr. Clinton’s proposal survives Congressional debate. Mr. Siegel’s seminal research on the market has indicated that stocks can be expected to earn about 7% annually over long periods.

Should Mr. Clinton’s plan or similar proposals become a reality, says investment researcher Roger G. Ibbotson of Ibbotson Associates in Chicago, the market should rise over five years or so, but then settle down as companies issue new stock, filling the increased demand.

But Mr. Ibbotson cautions: “Some people think the stock market is already high, so I’m not guaranteeing it will go up even if this has a positive effect.”

Then, too, the amount of Social Security money flowing into stocks would come in dribs and drabs, as the budget surplus grows over time, not at once.

With President Clinton projecting a federal budget surplus of $76 billion for the fiscal year ending Sept. 30, only $12 billion of that — or $60 million a day over 200 days — would go into stocks, notes Dallas L. Salisbury, president of the Employee Benefit Research Institute in Washington.

In contrast, the average daily volume on the New York Stock Exchange in 1999 so far has been $40 billion.

The Clinton proposal also assumes a federal budget surplus over the next 15 years, with a growing economy, little inflation and low unemployment. Any downturn would result in smaller surpluses, cutting into how much Social Security money could be invested.

Crain News Service