Social Security Financing

Implications of Stock Investing for the Trust Fund, the Federal Budget, and the Economy Gao ID: T-AIMD/HEHS-98-152 April 22, 1998

Allowing the Social Security trust fund to invest in the stock market is a complex proposal that has potential consequences for the trust fund, the U.S. economy, and federal budget policy. For the Social Security trust fund, stock investing offers the prospect of higher returns but greater risk. Higher returns would allow the trust fund to pay benefits longer, even without other program changes. However, if stock investing is implemented in isolation, the trust fund would inevitably have to liquidate its stock portfolio to pay promised benefits, and it would be vulnerable to losses in the event of a general stock market turndown. Although stock investing is unlikely to solve Social Security's long-term financial imbalance, it could reduce the size of other reforms needed to restore the program's solvency. For the federal budget, stock investing would have the immediate effect of increasing the reported unified deficit or decreasing any reported unified surplus because, under current budget scoring rules, stock purchases would be treated as outlays. Any money used to buy stocks would no longer be invested in Treasury securities, reducing the Treasury's available cash and more clearly revealing the underlying financial condition of the rest of the government. Without compensating changes in fiscal policy, stock investing would not significantly alter the impact of federal finances on national saving and the economy.

GAO noted that: (1) government stock investing is a complex proposal that has potential consequences for Social Security, the federal budget, and national saving; (2) it also differs in key ways from proposals to establish individual accounts; (3) for the Social Security Trust Fund, government stock offers the prospect of higher returns but, by itself, is unlikely to solve the program's long-term financial imbalance, and it would be accompanied by greater risk; (4) the key distinction between stock investing through the government and through individual accounts is that, under government stock investing, the risks and returns would be shared collectively through the government rather than borne individually; (5) more generally, individual accounts proposals would alter Social Security's current structure and scale back the income redistribution aspect of the current program; (6) from a budget perspective, shifting a portion of trust fund assets into the stock market would raise deficits or diminish surpluses in the short term but would not significantly affect national saving; (7) while government stock investing by itself has no direct effect on saving, it indirectly could prompt actions to raise savings by revealing the size of federal deficits excluding Social Security's temporary surpluses; (8) implementing a government stock investing proposal would raise issues about stock selection, administrative costs, and shareholder voting rights that, conceptually, do not pose major obstacles; and (9) however, some of these issues could raise concerns about increased government influence over the private sector.

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