NEW VISION FOR SOCIAL SECURITY\Panel considers shift into stocks.

Byline: Robert Pear The New York Times

A federal advisory panel appointed by the Clinton administration plans to recommend a radical change in policy for Social Security: investing billions of dollars of payroll contributions in the stock market.

The panel, whose proposed recommendations appear in a confidential draft of a report to be released this spring, is also discussing whether payroll tax revenue for Social Security should be kept in one big pool, as it is now, or whether some should be diverted to individual accounts, so workers could invest it in stocks and bonds of their choosing.

Such discussions would have been unthinkable just a few years ago. Politicians have been extremely reluctant to change Social Security because any misstep could provoke explosive reactions from the program's 43 million beneficiaries.

But this year the issue has surfaced in political debates. It provoked a bitter exchange last month between two candidates for the Republican presidential nomination, Steve Forbes and Sen. Bob Dole.

When Forbes suggested that a portion of younger workers' payroll taxes go into private retirement accounts, Dole ran television advertisements denouncing the idea as "a radical, untested plan that would end Social Security as we know it." But since then, Dole himself has expressed interest in the idea.

Gene B. Sperling, deputy assistant to President Clinton for economic policy, said tonight that the administration had opposed efforts to "privatize Social Security," but would review the recommendations.

Since the creation of Social Security in 1935, money paid into the program has been invested exclusively in interest-bearing government securities, mainly long-term bonds. But the 13-member advisory panel says in its draft report that the United States could obtain a higher return on investment and increase retirement savings for the baby-boom generation by channeling some of the money into the stock market.

"Stocks have outperformed bonds by a significant margin over long periods of time," said Edward M. Gramlich, professor of economics and dean of the School of Public Policy at the University of Michigan, who is chairman of the panel, the Advisory Council on Social Security.

The draft says that, while stock market investments would entail "a slight increase" in risk for Social Security, the risk would be manageable.

The advisory council, appointed in June 1994 by Donna E. Shalala, the secretary of health and human services, includes business executives, labor union leaders and pension experts chosen to represent self-employed workers and consumers in general.

Panel members have significant disagreements on such questions as: How much Social Security revenue should be invested in stocks? Who would manage the investments? How many private investment options should be allowed?

At least 8 of the 13 panel members say the money should be invested in mutual funds or some other portfolio of securities linked to a broad gauge of market performance, like the Standard & Poor's index of 500 stocks.

"Very few investment managers can beat the index year after year," said Marc M. Twinney Jr., a council member and actuary who was pension director of Ford Motor Co. until he retired last year.

The Social Security trust fund now takes in more money in taxes and interest than it pays out in benefits. But federal officials say the program will not be able to pay all the benefits earned by members of the baby-boom generation because, under the latest estimates, the trust fund will be depleted in 2030.

Robert M. Ball, a Democrat who was commissioner of social security from 1962 to 1973 and is a member of the advisory council, said Friday: "Some of the trust fund money should be put into the stock market. I want to do it to get a better return for the Social Security system. Historically, long-term Government bonds have had a real return, after inflation, of 2.3 percent a year, compared with 6.3 percent for stocks."

Under the approach favored by Ball, up to 40 percent of the money in the Social Security trust fund would eventually be invested by the government in a broad selection of private stocks intended to mirror the overall performance of the market.

Some critics say Ball's proposal would concentrate too much power in the hands of the government, giving federal officials leverage over private companies. But Ball said he would prohibit the manipulation of investments for political purposes and would require the government's money managers to purchase the same mix of securities as used in a standard index of the market.

Ball's proposal, supported by five other council members, would keep the level of Social Security benefits required under current law. It would not change payroll taxes for workers, but would increase income taxes on benefits for some retirees.

Other members of the council want to create an investment account for each person covered by Social Security.

Under the approach favored by Gramlich, the government would require each worker to contribute a small amount each year beyond their current level of payroll taxes.

"The accounts would be held by the Social Security system, but individuals would be free to choose whether to invest their accounts in stock index funds, bond index funds or some combination," he said. People would have perhaps 5 to 10 investment options, he added.