EDITORIAL : THERE'S NO FREE LUNCH BOND-INDEXING PLAN MIGHT BE HAZARDOUS FOR TAXPAYERS.

The Treasury Department's plan to issue government bonds that would protect average investors from inflation isn't as risk-free as it might seem on the surface.

While the object - to encourage individual Americans to save more - is praiseworthy, the potential liability for the government and the taxpayers might be significant.

Under the plan announced Thursday, the new bonds would offer returns that would rise and fall in line with inflation. The Treasury believes such a feature should attract more Americans to buy government bonds to pay for their retirement or their children's education. The bonds would be backed by the government and priced so that unexpected increases in inflation would not erode their value.

All well and good for bondholders. However, the announcement raised more questions than it answered. The Treasury has not decided how many bonds to sell, what inflation index to use in setting the prices for the bonds, and whether to sell 10-year or 30-year bonds, or both.

One of the biggest questions is what happens when the bonds mature in 10 or 30 years and inflation is higher than the current 3 percent. With indexed bonds the government saves money if the inflation rate keeps the yield - and therefore the government's borrowing cost - below that of fixed-rate bonds. If inflation rises, the bonds could prove to be much more expensive for the government over their lives than conventional bonds.

In short, the government is gambling that inflation will be lower than the market thinks it will be.

The idea for index bonds has some merit. Federal Reserve Chairman Alan Greenspan has expressed his strong support for the idea. But he also has warned that a lot depends on how they are designed and whether a liquid market develops.

The Treasury Department should proceed with all deliberate caution.