Should Social Security Invest In The Stock Market?
Andrew Biggs, Forbes.com
The Wall Street Journal features an online debate on whether the Social Security trust funds – which currently hold only special-issue government bonds – should instead seek out higher returns by investing in stocks. On the Pro side is Boston College economist Alicia Munnell, director of the Center for Retirement Research; arguing Con is Michael Tanner, a senior fellow at the Cato Institute (and, full disclosure, my former boss from when I worked at Cato in the early 2000s).
They both make some solid points. But it’s a short piece. And, inevitably, the points they make aren’t precisely those that I’d make. So here are a few extra thoughts on investing the Social Security trust funds that I think add something to the debate.
State and local pensions have a hard time investing in risky assets. For Social Security, it would be even harder. Most defined benefit pension plans – including both private sector pensions and state and local government employee pensions – calculate their annual required contributions based on a formula that accounts for the ups and downs of their investments. If the pension’s investments fall in value, then contributions in following years will have to be higher. That’s been a problem for state and local governments because they can’t meet the required payments. Even today, eight years past the end of the Great Recession, nearly half of state and local pensions don’t receive their full annual contribution.
But for Social Security it could be even worse, because – unlike most other traditional pensions – there’s no automatic balancing for Social Security financing. Social Security has been underfunded since the mid-1980s and Congress has done precisely nothing to fix the problem. And there’s nothing in the law that requires Congress to act. Investing the trust fund in stocks would add more volatility to Social Security’s finances, but with no requirement that Congress act to address that volatility.