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Stable Value & Social Security: What Could the Push for Social Security Privatization Mean for Stable Value

Stable Times Second Quarter, Vol. 9, No. 2, 2005

5 Pages Posted: 18 May 2006  

Christopher B. Tobe

Stable Value Consultants

Abstract

Chris Tobe, CFA, argues that a stable value option could become the dominant asset choice if and when Social Security is partially privatized as President Bush currently envisions:

· Although there has been little talk about specific investment options, both President Bush and Vice President Cheney have compared the administration's Social Security proposals to the existing Federal Thrift Savings Plan (TSP) model available to all federal workers.

· Nearly 50% of TSP assets are invested in the G-Fund, essentially a stable value option in which the U.S. Treasury guarantees participants that they will "receive a longer-term rate on short-term securities and at the same time avoid the market risk associated with longer-term securities."

· In a 401(k) stable value option, private third-party insurers or banks provide those types of benefits through contractual guarantees. There are no third-party guarantors in the G-Fund. Rather, the U.S. Treasury simply subsidizes the difference between short- and long-term rates for G-Fund investors—an enormous subsidy.

If a similar model is used for Social Security, will the Treasury be willing to underwrite such a huge subsidy for a far larger investor population (about 150 million Social Security participants versus about five million currently in the TSP)?

Tobe argues no, and lays out a likelier scenario by surveying large public plans where stable value options underwritten by third-party providers often make up 40% to 50% of total plan assets.

Keywords: Stable Value, Federal Thrift Savings Plan, TSP, G-Fund

JEL Classification: G11,G18,H55

Suggested Citation

Tobe, Christopher B., Stable Value & Social Security: What Could the Push for Social Security Privatization Mean for Stable Value. Stable Times Second Quarter, Vol. 9, No. 2, 2005. Available at SSRN: https://ssrn.com/abstract=901450

Christopher Tobe (Contact Author)

Stable Value Consultants ( email )

Louisville, KY
United States

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