Mr Alan Greenspan, chairman of the US Federal Reserve, yesterday criticised President Clinton's plans to invest social security funds in the stock market, saying he feared investments would fall victim to political manipulation.
Speaking to the Ways and Means Committee of the House of Representatives, Mr Greenspan said he feared government-directed investment in equities would lower the efficiency of capital allocation in the US, reduce productivity growth and hurt living standards.
Mr Greenspan also sounded a warning note about the stock market. The high level of US share prices "would appear to envision substantially greater growth of profits than has been experienced of late".
He also warned that the US economy's combination of high inflation and low growth could not continue indefinitely. A small slowdown might be required to sustain the expansion, he said.
In his State of the Union address on Tuesday night, Mr Clinton proposed setting aside $2,800 billion (#2,421 billion) of the projected federal surplus over the next 15 years to restore the social security retirement programme.
About $700 billion would be invested in the stock market in the hopes of getting a higher return. At present, social security reserves are required by law to be invested in Treasury securities, a safe but traditionally low-yield investment.
Mr Clinton wants to establish an independent board that would select stocks. He suggested the board's options would be limited to fairly neutral investments, such as stock index funds.
He also said the board would operate free of political pressures, but Mr Greenspan made it clear he did not believe this was realistic. "I am fearful that we would use those assets in a way that would create a lower rate of return for Social Security recipients."
Mr Greenspan cited studies showing that returns on state and local pension funds have been usually between two and three percentage points lower on average than comparable private pension funds.
Other studies suggested that the greater the proportion of political appointees who are trustees of a fund, the lower the rate of return.
Mr Greenspan has criticised proposals that social security funds be invested by government in the stock market before, notably in July in testimony before the Senate Banking Committee.
Mr Greenspan's intervention yesterday is likely to deflate a White House plan that many believe will encounter political opposition in any case.
Congressional Republicans do not support investing social security funds in the stock market. While acknowledging the programme is in financial straits, they favour encouraging Americans to open private investment accounts to manage on their own.
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