Investing Social Security Trust Funds in the Stock Market

By Marshall, David; Pham-Kanter, Genevieve | Chicago Fed Letter, December 1999 | Go to article overview

Investing Social Security Trust Funds in the Stock Market


Marshall, David, Pham-Kanter, Genevieve, Chicago Fed Letter


By 2022, Social Security outlays will begin to outstrip its revenues. Because of these deficits, the Social Security Trust is expected to run out of cash in 2034 (see figure 1).1 The source of this problem is Social Security's PayAs-You-Go structure, whereby beneficiaries are paid, not from their own accumulated deposits, but from the contributions of workers who are currently depositing money into the system. As large numbers of the babyboom generation retire, a small number of post-baby-boom workers will be supporting the pensions of this large population.

To avert the predicted bankruptcy, there are three options: 1) increase revenues by increasing the payroll tax and the earnings cap, 2) reduce benefits, and/or 3) increase the rate of return on funds in the Social Security Trust. In this Chicago Fed Letter, we take a closer look at the third option, increasing the rate of return on Social Security funds.

Under current law, the funds that remain after benefits have been distributed are stored in the form of risk-free Treasury securities. In recent history, however, equity investments have significantly outperformed Treasury securities. For example, the afterinflation annual return on Standard & Poor's 500 stocks for the 1947-96 period was 9.5%, while that of longterm Treasury bonds was only 1.8%.1 This difference in returns between stocks and Treasury bonds is known as the equity premium. Capitalizing on the equity premium by investing in stocks has been proposed as a painless way to prolong the viability of Social Security and is the impetus behind many reform packages. Currently, there are three House bills and two Senate bills of this type pending in the 106th Congress. The White House has also informally presented its own reform plan incorporating equities.

The reform plans fall into four categories. The first category comprises plans that dismantle the current Social Security system and replace it with personal retirement accounts.' With these plans, workers are allocated individual retirement accounts in which to deposit a percentage of their earnings. They can invest these funds in a selection of preapproved mutual funds or portfolios offered by precertified institutions. Upon retirement, individuals receive annuities based on their account balances.

The second category maintains the Social Security system but allows for a small part of workers' earnings to be deposited into individual accounts.4 These proposals are modeled after the Federal Retirement Thrift plan available to federal employees. Funds in individual accounts can be invested in preapproved mutual funds, and individual Social Security benefits are reduced by the amount diverted to the personal accounts.

The third class of proposals does not allow for individual accounts but permits the Social Security Trust fund to invest in stocks. An independent board would be established to oversee investments.5

Finally, there is a hybrid type of plan that allows for both individual accounts and a limited amount of investment of the Trust in the stock market.' As with the first two types of plans, individuals can invest money in their individual accounts in preapproved funds, and their Social Security benefits are reduced accordingly. In addition, a prelegislated percentage of the Trust fund would be invested in stocks.

The issue of stock market risk

The above review of the proposals shows that the reformers advocate two ways of increasing returns of Social Security deposits-allowing individuals to use their deposits to invest in the market and permitting the Trust fund to invest directly. Both of these types of proposals make two important assumptions that should be examined more closely.

The first assumption is that investment in equities will generate higher returns than investment in government bonds. While it is true that, historically, the average equity premium has been quite large, these high equity returns do not come without 1st. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

Investing Social Security Trust Funds in the Stock Market
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.