Social Security Trust Fund Investing in the Stock Market

The Wall Street Journal held one of its aperiodic debates last Sunday, this time on whether the Social Security Trust Fund should be allowed to invest in stocks.  One debater argued that such investing would reduce the need for dependence on benefit cuts or tax increases; the other claimed that government should stay out of the market.

It’s certainly true that investing in the stock market could produce better returns than the Trust Fund’s current requirement to invest wholly in (unmarketable) Federal debt instruments.

Stocks are riskier than bonds, so shifting some Social Security assets from low-risk, low-return Treasury bonds to high-risk, high-expected-return stocks would expose the program to greater financial risk. This risk, however, has to be balanced against the likelihood of a larger trust fund and thereby less need for benefit cuts or tax increases to shore it up down the road. Economists also make a theoretical argument that the plan would especially benefit the young—who haven’t yet accumulated much financial wealth—by enabling them to invest in high-yielding financial assets without direct exposure to market risk.

The problem with this, though, is that a realized loss risk in those stock investments would negatively impact everyone so invested: every person with a present or future claim on the Trust Fund were Social Security to take such a chance, rather than only those individuals who make the choice for themselves.  I’m one of those confident in the long-term profitability of stock investing, but that’s my choice.  No one else should be dragooned into the outcomes of my choice were I to turn out wrong and wind up eating cat food inside my cardboard box under a bridge abutment.

[N]o one wants the Social Security trust fund to control the stock market. Even if the entire trust fund was plowed into stocks, it would account for only a fraction of the market.

This is disingenuous.  It’s the government doing the investing; of course, it will move to protect its investment with laws attempting to bar losses, laws attempting to dictate the kinds of risks companies in the market should be permitted to take, laws demanding taxpayers make the Trust Fund whole from market downturns, laws….  Politics cannot be divorced from the Trust Fund’s investments or the outcomes of those investments.  Especially since, as is currently the case, so much of the Trust Fund’s contents finds its way into the general treasury through “borrowing.”  All for the welfare of our seniors, of course.

Better to duck the question altogether, and make an even more radical change to our retirement safety net: privatize Social Security, as I’ve suggested before.  Let individuals invest their monies (including those, if any, by law earmarked) for their own future retirement in the stock market—if they wish—and be responsible for their own outcomes only and not, as taxpayers, for the government’s, and so everyone else’s, outcomes also.

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