Social Insecurity? The Effects of Equity Investments on Social Security Finances

Posted: 28 Feb 2002

See all articles by Amy Rehder Harris

Amy Rehder Harris

Congressional Budget Office (CBO)

Noah Meyerson

Government of the United States of America - Congressional Budget Office (CBO)

Joel Smith

Government of the United States of America - Congressional Budget Office (CBO)

Abstract

In 2000, the Social Security system experienced an annual net inflow of over $150 billion, raising its balance to over one trillion dollars. Once the baby boom generation begins to retire, however, the annual surpluses will almost certainly turn into deficits, and the trust funds are predicted to be exhausted in 2038. Investing part of the trust funds in equities would increase the expected returns and thus improve the system's expected long-term finances. But with higher expected returns comes higher risk: Equity investment could potentially leave the system worse off. This paper uses the Long-Term Actuarial Model developed by the Congressional Budge Office to analyze both the higher expected returns and the additional uncertainty that accompany equity investment, while recognizing that uncertainty already exists in the system due to unpredictable demographic and economic factors. We find that there is a clear risk-return tradeoff in the short term, but that (given a consistent policy of equity investment) the magnitude of risk falls substantially over a 75-year horizon.

Suggested Citation

Rehder Harris, Amy and Meyerson, Noah and Smith, Joel, Social Insecurity? The Effects of Equity Investments on Social Security Finances. Available at SSRN: https://ssrn.com/abstract=296135

Amy Rehder Harris

Congressional Budget Office (CBO) ( email )

2nd & D Streets, SW
Long-Term Modeling Group
Washington, DC 20515
United States
202-226-2600 (Phone)

Noah Meyerson (Contact Author)

Government of the United States of America - Congressional Budget Office (CBO) ( email )

2nd & D Streets, SW
Long-Term Modeling Group
Washington, DC 20515
United States
202-226-2600 (Phone)

Joel Smith

Government of the United States of America - Congressional Budget Office (CBO) ( email )

2nd & D Streets, SW
Long-Term Modeling Group
Washington, DC 20515
United States
202-226-2600 (Phone)

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