WASHINGTON -- Permitting a portion of the Social Security trust funds to be invested in tax-exempt bonds would do little to boost overall demand in the municipal market, the head of the Congressional Budget Office said yesterday.

CBO director Robert Reischauer urged Congress not to change current law, which requires the trust funds to be invested exclusively in Treasury securities.

"Using less Social Security money to help finance the deficit in other federal accounts would mean only that private saving that is now invested in non-federal securities would have to finance that pan of the Treasury's borrowing," Reischauer said in testimony before the House Ways and Means Committee's subcommittee on Social Security.

"Hence, redirecting money from Social Security to investments other than Treasury debt could not expand non-federal investment as a whole," Reischauer said.

The issue of investing the trust funds in municipals first received widespread attention in 1990 when Sen. Bob Graham, D-Fla., and Rep. Robert Matsui, D-Calif., introduced bills to permit such investments.

At the time, Graham and Matsui said their proposals would create a new source of demand for muniCipals, which had suffered a drop-off in purchases by banks and institutional investors. Congress never acted on the measures.

But Reischauer said that shifting trust fund investments away from Treasuries and into municipals or other non-federal securities would probably produce no net gain in demand for them.

"If a significant flow of Social Security money into a particular security depressed the return of that security just a bit relative to others in the market, investors would take their funds out of those assets in search of others with higher returns." Reischauer said. "As a result, borrowing costs and the total supply of funds would change little."

Another problem with using the trust fund moneys for other investments, Reischauer said, is that the clout wielded by the billions available for investment would effectively set policy, favoring one sector over another.

"If the trust funds. bought all or most of the securities offered in the education-loan market, for example [this would] effectively confer authority on the trust funds to make and execute policy, since it could independently determine subsidies provided to various sectors or regions," Reischauer said.

When Graham and Matsui introduced their bills, the Public Securities Association expressed a related concern, saying that the choices made for investing the trust funds could affect other investors' ideas about various municipal bonds. If, for example, it became widely known that the trust funds had decided to avoid a particular municipality's debt, other investors would stay away as well.

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