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.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
7015.
Length: Date of creation: Mar 1999 Date of revision: Handle: RePEc:nbr:nberwo:7015
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Find related papers by JEL classification: G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
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References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
Thomas E. MaCurdy & John B. Shoven, 1992.
"Stocks, Bonds, and Pension Wealth,"
NBER Chapters,
in: Topics in the Economics of Aging, pages 61-78
National Bureau of Economic Research, Inc.
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