Social Security Financing

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 summarized this report in testimony before Congress; see: Social Security Financing: Implications of Stock Investing for the Trust Fund, the Federal Budget, and the Economy, by Barbara C. Bovbjerg, Associate Director for Income Security Issues, before the Senate Special Committee on Aging. GAO/T-AIMD/HEHS-98-152, Apr. 22 (27 pages).

GAO noted that: (1) 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; (2) for the Social Security Trust Fund, stock investing offers the prospect of higher returns but greater risk; (3) higher investment returns would allow the trust fund to pay benefits longer, even without other program changes; (4) 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 downturn; (5) 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; (6) beyond the clear tradeoff between greater risk for the prospect of higher returns, the government would face other implementation issues inherent in owning and managing a stock portfolio; (7) proposals for government stock investing typically suggest investing passively in a broad-based stock index to reduce both costs and the risk that the government would control individual companies; (8) 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; (9) any money used to purchase 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; (10) without compensating changes in fiscal policy, stock investing would not significantly alter the impact of federal finances on national saving and the economy; (11) any higher returns earned by the government would otherwise have accrued to other investors; (12) in short, by itself government stock investing would have no appreciable effect on future national income; (13) although the immediate budgetary effect of investing in stocks would be to increase unified deficits or decrease unified surpluses, stock investing might indirectly lead to changes in federal fiscal policy that could increase national saving; and (14) by making Social Security's surplus unavailable to the Treasury, stock investing could focus more attention on the budgetary imbalance that exists when this temporary source of funds is excluded.