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Stocks always return more than Treasury Bonds. ?So why doesn’t Social Security invest the trust funds in stocks rather than Treasury bonds?
The first reason is simple. ?The government wanted Social Security to be free from accusations of favoritism. ?Why should public businesses have access to government capital, when private capital doesn’t have that same advantage? ?The second reason is also simple: do we want the government to be an owner of a large percentage of the businesses of the country? ?Do you want the government to have even more influence on businesses than activist investors do?
The third reason is complex. ?Do you want to mess up the stock market? ?A large dedicated buyer would drive the market up to levels where future returns would be very low, much lower than at present. ?Very marginal businesses would go public to take advantage of the dumb capital.
Far from earning more money for Social Security, the investment would put in the top of the market. ?There would be a generational top where the brightest investors would leave the market,, ?Future returns would be low.
Not that anyone significant is suggesting it at present, but it is wiser to keep governments out of business management. ?Don’t reach for false gains in investment performance if the price is government involvement in the details of business.
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One more note: all of the benefits of Social Security are based off of labor earnings, not capital earnings. ?Most taxes are collected from labor income. ?That’s why Treasury bonds make sense — it is a neutral asset that is similar to those who receive the benefits. ?Treasury bonds are as broad-based as those who receive benefits.
I think many people are missing the economic importance of Social Security as a giant counter-cyclical flywheel inside the US economic system. Creating political risk fears and the potential for stock market crashes impacting it are likely to be very self-defeating for Social Security’s economic role.
Social Security checks most likely get spent within 30 days of showing up in the mailbox. Those checks are spent on vital consumer services, like rent, food, utilities, entertainment etc. All of these activities employ people, so those expenditures get turned into paychecks and payments to businesses very quickly. Social Security checks are probably some of the highest velocity money in the economy, especially important in this current time where money velocity has been languishing.
This will become more important over the next couple of decades as Social Security payments to baby boomers peak. Under current Social Security funding, those payments will continue during downturns over the next decade playing an important role in maintaining economic stability. The threat of reduced payments when the Trust Fund runs out as well as the threat of substantially depleting the Trust Fund in a stock market crash are critical reasons for stabilizing Social Security and maintaining its current condition. If Social Security ran out of money in the middle of a stock market crash, so it immediately had to reduce payments (like currently projected for 2034), then we would really see economic panic and spending shutdown by everybody over the age of 55 at exactly the wrong time.
If people think that Social Security is threatened in the next few years, then we will likely see more savings and less economic activity, the exact opposite of what the Fed has been trying to encourage for the past decade. Investing Social Security in the stock market would just turn it into another badly-managed pension fund instead of a fairly safe, well-regulated insurance annuity which is what it has been. I wonder if it would become insured by PBGC, so that it would have federal protection.