can SS be saved by buying stocks?

Doug Henwood dhenwood at panix.com
Thu Jul 29 08:10:10 PDT 1999


[Of course the question in the subject heading implies that it needs to be saved, which it doesn't, but...]

"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



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