The Outlook
WASHINGTON
Al Gore blasts George W. Bush for proposing to invest Social Security revenue in the stock market. But Mr. Gore's plan, if taken literally, probably depends more on the market than does Mr. Bush's.
Why? The vice president would pay off the federal debt around the end of the decade, and continue running surpluses, so he could use them decades later to pay for the baby boom's retirement. The federal government must invest those trillions of dollars in surpluses somewhere, and corporate stocks and bonds are the obvious places. "The government would have to buy some nongovernment assets," says Gore economic adviser Alan Blinder.
This is new budget math. White House economists have focused on paying off the debt but ignored the question of what happens afterward. "The government would have to invest in America's businesses," says University of California economist Brad De Long. "It's very weird."
If it happens, it also will be unprecedented. Andrew Jackson was the only president to have paid off the debt and still collected surpluses. In 1837, he sent the extra money to state governments as bonuses. Twice, the U.S. came close to eliminating the debt, but the War of 1812 and World War I intervened.
The Gore plan calls for the government to start buying assets around 2010 and to hold them until around 2060. The sums involved are huge. By 2030, the federal government would own assets equal to 27% of the economy; in today's terms, that's about $2.5 trillion.
The problem may seem academic, but it's already roiling bond markets, which aren't sure how they will conduct business if the Treasury largely stops issuing bonds. Goldman Sachs economist John Youngdahl worries that other debt instruments will necessarily be more risky. In case of a financial crisis, he asks, what will investors turn to for safety? The Federal Reserve also is looking at what other instruments it should buy and sell.
The changes are critical to Mr. Gore's politics and policy. Seeking debt elimination helps to position him as a sober economic steward. If the surpluses are spent on other government programs or reduced through tax cuts, Mr. Gore wouldn't have enough money to keep Social Security solvent for as long as he is now promising, until 2054.
Mr. Bush doesn't face the same questions about what to do with surpluses because he's promising to cut taxes and revamp Social Security, not pay off the debt. So what, exactly, to do with the money?
Buying gold, as the U.S. did in the 19th century, doesn't make sense, says Mr. Blinder, the Gore adviser, because it's "a depreciating asset." Foreign stocks and bonds? "Hard to imagine ... because of nationalism," he says. That leaves U.S. stocks and bonds, he argues.
But that produces other problems for the vice president. Last year, Mr. Gore and the Clinton administration proposed that the government should use as much as 15% of the Social Security trust fund to buy stocks and bonds to boost retirement-fund revenue. But Fed Chairman Alan Greenspan criticized the plan because he believes it would inevitably lead the federal government to intervene politically in markets.
Last month, Mr. Gore said he had taken the Greenspan criticism to heart and no longer backed government purchases. Trouble is, his advisers acknowledge, the Gore debt-reduction proposal inevitably leads to the same kind of government stock purchases he has publicly forsworn. "Implicitly, Gore has to rely on private asset markets," says former Congressional Budget Office chief Robert Reischauer.
Mr. Blinder says the federal government's role could be limited to passive investment, so it wouldn't use its massive investments for political ends: "A reasonable guess is that the government will start buying index funds of stocks and bonds, so it doesn't favor one companyover another."
Treasury Secretary Lawrence Summers says the government could chose "high-grade securities that have risk properties quite similar to Treasury debt."
Another possibility is that Mr. Gore could use the coming surpluses to sweeten his new Retirement Savings Plus accounts. Under that plan, the federal government would offer generous tax credits for families that set aside money for savings. By committing more government resources to such accounts, he could reduce the benefits paid out under traditional Social Security accounts. That option is nearly the same as Mr. Bush's plan to place a portion of Social Security taxes to personal retirement accounts.
Over the coming years, economists are sure to debate the merits of different ways to handle the burgeoning surpluses. But for Mr. Gore the lesson is already clear: be careful what you wish for.
-- Bob Davis