The future of social security.

• Author: Greifer, Nick

President Clinton's January State of the Union address kicked off a new phase in the ongoing debate over Social Security's future. He proposed a plan that allocates future budgetary surpluses for Social Security and which would allow the federal government to invest in the private sector and provide a new supplementary savings vehicle. The plan would leave the benefit structure largely intact.

What does the plan mean for state and local governments? What is the larger overall impact of this reform effort? And what are the competing plans? This article will examine these questions.

The Structure of the Clinton Plan

The President's plan has three primary features: 1) leaving the retirement benefit structure unchanged; 2) redirecting the current assets so that they are in higher-yielding investments; and 3) supplementing private savings through Universal Savings Accounts (USA). The plan is a hybrid that retains the existing defined benefit structure of Social Security, supplemented by the USA defined contribution savings vehicle.

The benefit structure is not significantly reformed. For example, the retirement age is not raised to counter the growth in the number of elderly eligible for Social Security and to offset the longer time spent in retirement associated with longer life expectancy.

The administration would have the federal government invest the assets of Social Security in the stock market for the first time. While not a full-blown privatization scheme, it would set a precedent of federal involvement in the private equities market.

There are $2.7 trillion cumulative surpluses projected over the next 15 years. Of this, $700 billion would be invested in an equity index fund. This "passive management" approach would create a boundary between the government acting as an investor and the companies in which it invests. However, it seems to be a permeable boundary. Some observers have argued that the federal government could face a temptation to make investment decisions based on political criteria rather than solely fiduciary criteria. On the other hand, proponents of this approach counter that the federal government should try to obtain higher returns through equity investments.

An interesting feature of this plan is that it borrows partially from state and local practices developed over the years in investing pension assets. Nearly all state and local pension systems have long allocated a portion of assets to equities, and this proportion...