IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/130383.html

The Forced Bid What Privatizing Social Security Would Do to Stock Prices, and Why Recent Developments in the Economics of Market Flows Strengthen the Case Against It

Author

Listed:
  • Lane, Edward

Abstract

Proposals to privatize Social Security through personal investment accounts rest on the assumption that equity markets will deliver real returns of 6 to 7 percent, exceeding what the current program can pay. This paper examines that claim from actuarial, financial, and fiscal perspectives and finds it fails in each. Actuarially, Social Security is not an investment account but a package of inflation-indexed insurance benefits, retirement, disability, survivor, and family coverage, delivered through a progressive formula; no private portfolio replicates this package at comparable cost. Financially, the paper applies the inelastic markets hypothesis (Gabaix and Koijen, 2021), which holds that a dollar of net equity inflow raises total market capitalization by roughly five dollars, to a 2005-style carve-out diverting approximately $330 billion annually into automatic, price-insensitive equity purchases. Under this framework, valuations rise approximately 28 percent above baseline within a decade, compressing forward returns by nearly one percentage point annually and generating roughly $15 trillion in capital gains accruing predominantly to the top decile of households. Crucially, the classical framework of Diamond and Geanakoplos (2003), in which bond issuance offsets equity flows and prices barely move, reaches the same policy verdict by a different route: the equity risk premium shrinks as risk spreads across the workforce, eliminating the excess return the proposal requires. Both models therefore undermine the projected returns, and neither changes the real economics of retirement, which is funded by future production, not financial claims. Fiscal analysis in the functional finance and Modern Monetary Theory traditions confirms that personal accounts financed by government borrowing create no new national saving. The paper concludes that if broader asset ownership is the goal, the appropriate instrument is a voluntary, low-cost add-on savings vehicle layered atop an intact Social Security system, not a carve-out of the payroll tax. In preparing this paper, the author used an AI assistant (Anthropic's Claude and Perplexity, powered by GPT-5.1) for drafting, editing, and formatting support. All analysis, arguments, and conclusions are the author's own, and all references and figures were verified against primary sources.

Suggested Citation

  • Lane, Edward, 2026. "The Forced Bid What Privatizing Social Security Would Do to Stock Prices, and Why Recent Developments in the Economics of Market Flows Strengthen the Case Against It," MPRA Paper 130383, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:130383
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/130383/1/MPRA_paper_130383.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    JEL classification:

    • H5 - Public Economics - - National Government Expenditures and Related Policies
    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • I38 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Government Programs; Provision and Effects of Welfare Programs

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:130383. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.