"Asset Allocation and Risk Allocation: Can Social Security
Improve Its Future Solvency Problem by Investing in Private
Securities?"
BY: THOMAS E. MACURDY
Stanford University
National Bureau of Economic Research (NBER)
JOHN SHOVEN
Stanford University
National Bureau of Economic Research (NBER)
Paper ID: National Bureau of Economic Research Working Paper No.
7015
Date: March 1999
Contact: THOMAS E. MACURDY
Email: Mailto:tmac at leland.stanford.edu
Postal: Stanford University
30 Alta Road
Stanford, CA 94305-8006 USA
Phone: (650)723-3983
Fax: (650)725-5702
Co-Auth: JOHN SHOVEN
Email: Mailto:shoven at leland.stanford.edu
Postal: Stanford University
Stanford, CA 94305-8006 USA
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ABSTRACT:
This paper examines the economics of investing the central trust
fund of Social Security in private securities. We note that
switching from a policy of having the trust fund invest solely
in special issue Treasury bonds to one where some of the
portfolio holds common stocks amounts to an asset swap. Such an
asset swap does not increase national saving, wealth or GDP. We
also show that it is far from a sure thing in terms of improving
the finances of the Social Security system. The asset swap is
deemed successful if the stock portfolio generates sufficient
cash to pay off the interest and principal of the bonds and
still have money left over. It is deemed a failure otherwise. By
using historical data and a bootstrap statistical technique, we
estimate that the exchange of ten or twenty year bonds for a
stock portfolio would worsen social security's finances roughly
twenty to twenty-five percent of the time. Further, failures are
autocorrelated meaning that if the strategy fails one year it is
extremely likely to fail the next. Such high failure rates imply
that the defined benefit structure of benefits becomes less
credible with stocks in the trust fund.
JEL Classification: H55