SAVING PRIVATE BUY-IN: SNAFU IN FIGHT TO FIX SOCIAL SECURITY — SOME FEAR GOVERNMENT WILL TARGET INVESTMENT

Beware of politicians bearing “gifts.” Investing a portion of the Social Security trust fund in stocks and bonds might sound like a great way to shore up the system — not to mention money managers’ coffers — but it also could lead to more government involvement in the markets, in the form of economically targeted investments.

While there are numerous plans to reform Social Security, there is no movement in Congress yet to link Social Security privatization to economically targeted investments such as loans to minority businesses or community development institutions. But some observers believe government control of Social Security investments could create a political football with some $68 billion a year.

And community activist groups, who are able to attract grants from banks under the Community Reinvestment Act, make no secret of their plans to demand more from securities firms and mutual funds, with or without Social Security individual accounts.

“Whether it’s done under CRA or some other government policy, it’s simply a democratic principle that ought to be applied to all financial industries,” says John Taylor, president and chief executive officer of the National Community Reinvestment Coalition in Washington.

But Rep. Earl Pomeroy, D-N.D., who plans to introduce legislation allowing the government to invest 50% of the Social Security trust fund, currently $750 billion, insists he will include enough safeguards to prevent the system from being politicized.

“There may be those with other agendas, but frankly they’re not in the mainstream at all,” says Rep. Pomeroy, who served on North Dakota’s investment board for eight years when he was the state’s insurance commissioner. “This is about having a secure Social Security check when (recipients) reach age 65. This isn’t about some new social investment experiment with Social Security money. That’s a nonstarter.”

Community activists clearly see things differently. They have already been pushing to expand to securities firms, insurance companies and mutual funds the Community Reinvestment Act, which requires banks to invest in their local communities and in low-income areas. A provision in the financial deregulation bill that passed the House in May puts financial holding companies under the CRA, setting a new precedent for extending those obligations to entities that do not have the benefit of federal deposit insurance.

“Any time the government allows the private sector to benefit from holding and distributing public revenues there ought to be an obligation attached to that privilege, to meet the credit needs of traditionally underserved people,” Mr. Taylor says.

The Clinton administration has already made moves to further social investing goals. In 1994 the Department of Labor’s Pension and Welfare Benefits Administration issued a bulletin saying pension funds can engage in social investments as long as they’re prudent.

Former Labor Secretary Robert Reich, Transportation Secretary Federico Pena and Housing and Urban Development Secretary Henry Cisneros also favor using pension investments to boost the economy. And last year, Eugene Ludwig, then-Comptroller of the Currency, suggested the Community Reinvestment Act be extended to cover the entire financial services industry.

intervention opposed

Such an idea doesn’t sit well with Republicans in Congress who also oppose moves to tie social investing to Social Security privatization. “That may be part of the debate, but I think in the end those efforts would be thwarted,” says Rep. Mark Sanford (R-S.C.), author of a bill that would set aside 8 percentage points of the current 12.4% payroll tax for private Social Security accounts.

He opposes Rep. Pomeroy’s plan. “If politics has proven any one thing it’s that Henry Waxman (D-Calif.) doesn’t like tobacco. If you let each congressman have a say in how pensions are invested, you’d have a very hamstrung investment policy.”

The Securities Industry Association also opposes direct government investment in the markets. “When talking about peoples’ retirement, I think it’s a mistake to allow politics to enter into those decisions,” says SIA President Marc Lackritz. “You want people to act as fiduciaries, doing the best you can for that account.”

Michael Tanner, director for health and welfare studies at the Cato Institute, a libertarian think tank in Washington that advocates allowing workers to invest all their Social Security taxes in private accounts, also opposes government control. He cites the $140 billion California Public Employees’ Retirement System, with its $67 billion in U.S. equities, as a prime example of an over-politicized pension system.

Spokesman Brad Pacheco responds that CalPERS is “very vocal about issues of corporate governance because we believe good corporate governance is good business.”

Mr. Tanner thinks social investing has gone too far. He says some states prohibit their pension funds from investing in northern Ireland, and New York City threatened to pull out of Swiss banks because of their role in the confiscation of Holocaust victims’ property during World War II.

momentum is lacking

While the debate is still young, even the Hill’s most liberal Democrats are not joining a push for social investing. An aide to Sen. Edward M. Kennedy, D-Mass., ranking minority member of the Senate Labor Committee, says his boss is focusing on opposing private accounts because of the reduction in guaranteed benefits they would cause.

“I think that there’s a bigger, more fundamental issue on the program that needs to be addressed,” he says.

He’s not kidding. Mandated Social Security benefit payments are expected to exceed payroll taxes by 2013, and the trust fund will run out of money by 2032, estimates the Social Security Administration. If nothing is changed, benefits would have to be cut by 25% in 2032 to match tax receipts, and Rep. Pomeroy and many others in Congress doubt there is political will to pay higher payroll taxes to finance the system.

Rep. Pomeroy’s chief aim in supporting direct investment of Social Security money by the government is to prevent cutting guaranteed benefits or raising the retirement age to 70, which would be necessary under plans to set up individual accounts. Many such plans have been proposed including one by Senators Daniel Patrick Moynihan, D-N.Y., and Robert Kerrey, D-Neb.

Meantime, Rep. Pomeroy’s bill likely would have investments run by a board structured much like the Federal Reserve, with members appointed for long terms by the president and confirmed by the Senate. The board would oversee bidding for one or more money managers to run a portfolio of market-linked index funds.