Three Key Design Issues in Analyzing the Trust Fund Investment Policy

Abstract

This paper provides a unified conceptual framework for understanding the previous literature analyzing the proposal to invest the Social Security Trust Fund in equities. The impact of investing the Social Security Trust Fund in equities on the resources of current and future generations, as well as its impact on unfunded liabilities , depends on three policy design choices: (1) how the in- crease in expected revenue from Trust Fund investment is allocated relative to a solvent counterfactual baseline; (2) how the risk asso- ciated with Trust Fund investment is allocated when realized re- turns differ from expectation ; and (3) the tax base , if any, that risk is allocated to. The choice for each determines whether the expected value and risk is passed to the same generation or whether the ex- pected value is allocated to one generation while the risk is allo- cated to another. The matching , or lack of matching, of the expected return and risk determines the distributional and economic impact of Trust Fund investment.