The following is an open letter to Alan Greenspan, chairman of the Federal Reserve.
You are wrong, Mr. Greenspan. At a recent hearing on Social Security, you told members of the House Subcommittee on Finance and Hazardous Materials that the independently run Federal Reserve pension plan is proof the federal government sometimes can invest directly in stocks without political interference.
In fact, investment managers for the Retirement Plan for Employees of the Federal Reserve System, with nearly $6 billion in assets, do not have a completely free hand in managing the assets. The defined benefit pension plan's investment guidelines expressly forbid money managers from making or continuing to make investments in companies "whose products or activities are subject to broad-based social or political censure."
This policy has been on the books since 1978, long before any debate over investing a portion of Social Security assets in stocks.
Such strictures, whether social or political, are precisely what you told lawmakers you feared might be applied to Social Security assets invested in equities, should Congress approve such a proposal.
You're not the only Fed official unaware of the pension plan's social investing policy. Edward M. Gramlich, a Fed governor who headed a national commission on Social Security in the mid-1990s and who opposes the Clinton administration's proposal to invest part of Social Security assets directly in stocks, expressed dismay when he learned about the constraints.
Social investing proponents could just as easily argue the Fed's pension plan has done well by doing good -- it has performed as well as or outdone its benchmark for years. Still, investment experts maintain the policy is a potential minefield for the eight outside money managers that invest the assets.
How do they determine what is "social or political censure"? Should they simply boycott all sin stocks -- companies associated with tobacco, alcohol, guns and gambling? Should they refrain from investing in Microsoft Corp. because it is embroiled in an antitrust case with the federal government? What about Time Warner Inc., which produces music by artists promoting violence?
In an age where data travel within nanoseconds on the information superhighway, a company that is hot one day easily could become a pariah the next because of fickle consumer attitudes.
To be sure, the Fed's pension fund also operates under other investment restrictions, such as not investing in banking stocks, but those make sense because of the central bank's role as a banking regulator.
What's more, Paul C. Lipson, the pension fund's chief investment officer, notes the pension fund never has actually told any managers to sell a particular stock because of the social investing policy. Still, Mr. Lipson, who believes this policy is the key to the fund's strong performance during the past two decades, also notes investment managers are so acutely aware of the policy they simply steer clear of any stocks that might raise issues with the plan's investment committee.
If a $5.9 billion federal pension plan exerts such control over its so-called independent investment managers, who knows what controls might be exerted over investments by a multitrillion pool of Social Security assets?
So, even though you used the wrong example, Mr. Chairman, you reached the right conclusion. Let the government stay out of investing Social Security money in stocks.