Separation of Stocks and Stock
The most arresting part of President Clinton's State of the Union message was his proposal to shore up the Social Security system. The president is correct in focusing on this challenge.</br></br>In 1950 there were 16 taxpaying workers for every retired person in the U.S. Today there are just over three workers per retiree, and the ratio is expected to fall below two during the next century. If Social Security benefits are to be maintained under present arrangements, substantial tax increases will be required on workers and companies -- a burden that will discourage employment. Alternatively, other government receipts will be required or large government deficits will reappear. Small wonder that Mr. Clinton has searched for a magic bullet that might painlessly avoid the hard choices.</br></br>There are two parts to the president's proposal. The first is to preserve the budget surplus and allocate a substantial proportion to the trust fund. The second is to shore up the system by investing $700 billion from the trust fund in the stock market over the next 15 years. Presumably by investing in stocks that historically have produced returns considerably above the yield on long-term Treasury bonds, the trust fund would grow more rapidly, and the date when the fund would run out of money would be pushed out much later in the century.</br></br>Mr. Clinton's proposal to invest part of the trust fund in equities is the more radical part of his plan. It is a bad idea with unpredictable and probably damaging consequences. Moreover, simply investing a part of the trust fund in stocks will not provide the extra resources to spare us from making hard choices during the next century.</br></br>Having the government invest in private securities runs against the principles of free markets and could well interfere with the efficiency of the capital-allocation process. While the government would undoubtedly propose that the funds be given to an independent or private agency that would invest in a very broad equity index of perhaps thousands of securities, such a plan would necessarily increase the allocation of capital to larger companies at the expense of very small entrepreneurial concerns that lack the liquidity to accommodate large government purchases. Many of these smaller start-up companies are responsible for important productivity improvements.