[Congressional Record Volume 142, Number 38 (Tuesday, March 19, 1996)]
[Senate]
[Pages S2337-S2338]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                        EVERY MAN A PETER LYNCH

 Mr. SIMON. Mr. President, one of the more informative journals 
that I read is one called Grant's Interest Rate Observer. It contains 
information that I find in no other journal.
  James Grant, the publisher and editor, also makes observations about 
a variety of things, and recently he had comments on the suggestion 
that part of the Social Security fund be invested in the stock market.
  Before people start chasing this rainbow, it would be good to read 
his thoughtful observations which I ask to be printed in full in the 
Record.
  The article follows.

          [From Grant's Interest Rate Observer, Mar. 1, 1996]

                        Every Man a Peter Lynch

       In the Nixon years, it was said triumphantly that only a 
     Republican could have opened China. Perhaps the Clinton 
     administration believes that only a Democrat can open Wall 
     Street. On February 17, The New York Times disclosed that a 
     federal advsisory panel will recommend an epochal change in 
     Social Security policy; investing billions of dollars of 
     payroll taxes in the stock market.
       For now, of course, the Social Security Trust Fund holds 
     only Treasury securities, $483 billion's worth at last 
     report. In fiscal 1994, $381 billion, in round numbers, was 
     paid into Social Security (via payroll taxes, from employers 
     and employees combined), and $323 billion was paid out. The 
     Treasury issued special, non-negotiable, interest-bearing 
     claims to the Social Security Trust Fund to acknowledge 
     receipt of the difference. The difference, $58 billion, was 
     ``invested'' only in the sense that it wasn't actually 
     stolen. It was spent. (A Mexican official once told the 
     British journalist James Morgan, apropos of government 
     ``investment'': ``Senor, the money that was stolen was 
     invested better than the money that was invested.'')
       In 1974, the Social Security System was consolidated for 
     accounting purposes into the unified federal budget. In 
     effect, a Social Security surplus (such as the nation 
     currently, and temporarily, enjoys) works to reduce the 
     reported federal deficit; a shortfall tends to expand it. It 
     follows that any redeployment of Social Security assets into 
     the stock market would force an identical increase in federal 
     borrowing. So also, a diversion of an individual's payroll 
     taxes into an earmarked equity investment account would force 
     a corresponding rise in federal borrowing--other things being 
     the same.
       However, it is always possible that other things would not 
     be the same. Things could

[[Page S2338]]

     improve. A revitalized private sector might generate more tax 
     revenue than even the government could spend, or investment 
     returns might beggar even those of the past five years, 
     causing the much feared $11 trillion unfunded Social Security 
     liability (the difference between the present value of 
     promised benefits and the present value of projected taxes) 
     to melt away like the much feared banking calamity of 1990-
     91. How often have free markets made short work of allegedly 
     intractable political or economic problems? Often enough, in 
     our experience.
       Yet, to us, the heart of the Social Security trial balloon 
     was contained in the Times story's perceptive third 
     paragraph: ``Such discussions would have been unthinkable 
     just a few years ago,'' and in a quotation from the chairman 
     of the Clinton study group, Edward M. Gramlich, professor of 
     economics and dean of the School of Public Policy at the 
     University of Michigan, a few paragraphs below that: ``Stocks 
     have outperformed bonds by a singificant margin over long 
     periods of time.''
       Did anyone in public life remember to put in a good word 
     for stocks at the bottom of the 1969-74 bear market, or on 
     the Tuesday following Black Monday in October 1987? According 
     to the Times, the draft of the report by the Advisory Council 
     on Social Security puts on a brave, bull-market face: ``While 
     stock investments would entail `a slight increase' in risk 
     for Social Security,'' the paper relates, ``the risk would be 
     manageable.'' And another panel member boldly affirmed: 
     ``Beyond the floor of protection provided by Social Security, 
     we should let people participate fully in this economic 
     miracle that we call America.'' Will the panelist's economic 
     patriotism be just as intense during the next cyclical 
     downswing, we wonder, or will it be subject to revision?
       It is almost certainly no accident that the Social Security 
     investment plan came into the world at the same time as Dow 
     5,500. According to James A. Bianco, Arbor Trading Group, 
     Barrington, Ill., the capitalization of the U.S. stock market 
     at year-end 1995 stood at 87.5% of GDP, the highest such 
     percentage in history. ``Likewise,'' Bianco went on, ``the 
     size of available cash, or M-2, to the size of the stock 
     market is the lowest in history at 57.1%. What this suggests 
     is that the stock market is grossly overvalued.'' Enthusiasts 
     for what would boil down to the greatest bond-for-stock swap 
     in the history of the republic have thought of everything 
     except what the stocks would be worth.

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