How Would Investing in Equities Have Affected the Social Security Trust Fund?

Abstract

Some observers believe that investing a portion of the Social Security Trust Fund in equities would strengthen its finances and improve the program’s intergenerational risk-sharing.  However, equity investments would also expose the program to greater financial risk and potentially greater political risk.  Monte-Carlo simulation methods are used to investigate whether equity investments would likely strengthen the long-term outlook of the Trust Fund relative to the current policy of investing 100 percent of reserves in U.S. government bonds.  The issues surrounding equity investments also go beyond expected returns on the Trust Fund portfolio.  Concerns of government interference with the allocation of capital in the economy and with corporate decision-making as well as the accounting treatment of equity investments are also discussed.

This paper found that:

• Both prospective and retrospective analyses suggest that investing a portion of the Social Security Trust Fund in equities would have improved its finances.
• Little evidence exists that Trust Fund equity investments would disrupt the stock market.
• Accounting for returns on a risk-adjusted basis would not show any up-front gains from equity investment, but gains would become evident over time if higher returns were realized.
• Equity investments could be structured to avoid government interference with capital markets or corporate decision-making.

 
The policy implications of this paper are:

• Investing a portion of trust fund assets in equities would likely reduce the need for higher payroll taxes.
• At the 50^th percentile of outcomes, equity investing has the potential to maintain a healthy Trust Fund ratio through the 75-year period.
• The experience with the Thrift Savings Plan provides a road map for separating the government from actual investment decisions.