Paternalistic and Insulting

That's how economists and investment advisers described President Clinton's insistence in a speech Wednesday that the federal government knows better than taxpayers how to spend projected federal budget surpluses.

     "I think it's outrageous that our president will not trust people with their own hard-earned money," said Peter Bell, vice chairman of the Center for New Black Leadership, a research group promoting market-oriented ideas among black Americans.

     "I suggest he ask anyone with a 401(k) retirement fund whether they'd like government bureaucrats to invest their money or whether they want to control their own investments," Mr. Bell said.

     "This shows the tremendous arrogance of people who populate this administration. It is a nanny government full of paternalistic people who believe that their Ivy League degrees make them qualified to make decisions for average Americans," said Scott Hodge, chief economist for Citizens for a Sound Economy.

     "This is the same administration that didn't believe we were smart enough to choose our own health care and our own doctors," Mr. Hodge said.

     In an address in Buffalo, N.Y., the morning after his State of the Union address, Mr. Clinton made a pitch to use the bulk of expected massive budget surpluses for Social Security -- and not for Republican tax cuts -- by telling the crowd: "We could give [the surpluses] all back to you and hope you spend it right."

     But, he went on, "if you don't spend it right," Social Security shortfalls will surface "just 14 years away."

     But Mike Tanner, the Cato Institute's chief Social Security expert, said that Mr. Clinton was essentially saying that "the American people aren't smart enough to save for their own retirement."

     "I don't think the federal government has been particularly responsible in how they've managed the Social Security program which is now $10 trillion in debt," Mr. Tanner said. "Weren't they responsible for the savings and loan debacle?"

     These and other critics of the current Social Security system argue that it offers a very low, and in some cases negative, investment return for workers who could reap much higher retirement income with an IRA-type that invested in stocks and bonds.

     Mr. Clinton said Wednesday that it would be better for ordinary Americans if the government decided how to spend and invest the Social Security surplus than simply to give most of it back in lower taxes or by allowing workers to invest part of their payroll taxes in their own retirement funds, as Republicans are proposing.

     Rejecting an across-the-board tax cut, the president has proposed using another slice of the budget surplus to rebate the money to certain middle- and lower-income workers in order to set up savings accounts for their retirement.

     He would take part of the surpluses to bolster the New Deal-era program -- some $700 billion --and turn them over to an independent government board to invest in the stock market.

     Supporters of Mr. Clinton's approach suggest that many people could not be trusted to control their own retirement funds, especially those on the lower end of the economic ladder.

     "A lot of people can make good decisions and will be better off under a privatized system, but they tend to be in the upper-income brackets," said economist Barry Bosworth at the Brookings Institution.

     "There will also be those -- particularly among lower-income groups -- who simply don't plan for their retirement or will make bad investment decisions," said Mr. Bosworth, who was President Carter's economic adviser.

     But economists and investment industry experts maintained Thursday that not only can people in most economic circumstances be trusted to make wise investment decisions, they are already doing it in large numbers; and that more will join them if the government lets them keep more of what they earn.

     "It's a political nonstarter to say that people are not smart enough to handle their own money," Mr. Bell said.

     John Collins, chief spokesman for the Investment Company Institute, which represents the mutual fund industry, said that 66 million Americans, or 37 percent of all households, now own stock mutual funds directly or through their 401(k) retirement plans at work.

     When direct individual stock ownership and employee pension plans are added to the equation, polls show that 45 percent of the country, or about 125 million Americans, own shares in the American economy. And most of them are middle class.

     "The typical mutual fund investors have a median household income of $60,000 and the median age is 44. So it's middle age and middle class," Mr. Collins said.

     Notably, a significant number of people who fall below the median are also invested in stock mutual funds. Mr. Collins said that 11 percent of mutual fund owners had household incomes of less than $25,000, 15 percent had incomes between $25,000 and $35,000, and 17 percent had incomes between $35,000 and $50,000.

     "When these people were asked why they were investing, 85 percent said for retirement," Mr. Collins noted.

     As for concerns that many Americans would not know how to invest wisely, the ICI's studies found that as many as 70 percent buy stock mutual funds from brokers, bankers, financial planners and insurance companies.

     "Maybe that's a reflection of their being pretty smart," Mr. Collins said.