Should Social Security Invest in Equities?

Investing some of the Social Security trust fund’s assets in equities has obvious appeal. Equity investment has higher expected returns relative to safer assets, so Social Security might need less in tax increases or benefit cuts to achieve long-term solvency. On the other hand, equity investments involve greater risk and raise concerns about interference in private markets and about misleading accounting that suggests the government can get rich simply by issuing bonds and buying equities. The real world provides a convincing case that governments can invest in equities in a sensible manner. Canada has a large actively managed fund, follows fiduciary standards, and uses conservative return assumptions. In the United States, the Railroad Retirement system has also invested in a broad array of assets without interfering in the private market, as has the Federal Thrift Savings Plan, where the government plays an essentially passive role. But do the demonstrated successes mean that equity investment should be part of a solution for Social Security? The prerequisite for such activity is a trust fund with significant assets to invest. The current trust fund is rapidly heading to zero; the likelihood of raising taxes to rebuild it is low; and borrowing to do so does not guarantee any additional resources for Social Security. The discussion proceeds as follows. The first section provides background on motivation for equity investment and the concerns of the critics. The second section describes investing initiatives by three retirement plans – the Canada Pension Plan, the Railroad Retirement system, and the Federal Thrift Savings Plan – and evaluates them against the critics’ concerns. The third section explores whether, even if the concerns were addressed, equity investment could be part of a package to restore financial stability to Social Security. The final section concludes that while the mechanics are totally manageable, the time may have passed for raising taxes enough to accumulate a large enough trust fund to make the effort worthwhile.