Social Security Trust Fund Research Articles

Should the Social Security Trust Fund Hold Equities? An Intergenerational Welfare Analysis

In a stochastic economy with overlapping generations, fiscal policy affects the allocation of aggregate risks. The paper shows how to compute the welfare effects of marginal policy changes that shift risk across cohorts, in general and for an application to social security equity investments. I estimate the relevant correlations between macroeconomic shocks and equity returns from 1874–1996 U.S. data, calibrate the model, and find positive welfare effects for equity investments. Since stock returns are positively correlated with social security's wage-indexed benefit obligations, equity investments would also help to stabilize the payroll tax rate. Journal of Economic Literature Classification Numbers: E62, H55.

The Effect of Errors in the CPI on Social Security Finances

This article provides detailed estimates of the effects of measurement bias in the Consumer Price Index (CPI) on the Social Security trust funds. Not including the effect of the housing error in the CPI, the estimated overpayment of benefits in 1997 was $26 billion, and, taking interest into account, the total drain on the Old-Age, Survivor and Disability Insurance (OASDI) Trust Funds was $55 billion. At the end of 1997, the present value of the entire effect of the error through 2040 was $965 billion. Combining the overpayments from the housing error with the biases considered in this article, the cumulative effect on the OASDI Trust Fund was $763 billion at the end of 1997, with an additional present value of $519 billion in overpayments to come through 2040.

Would a Privatized Social Security System Really Pay a Higher Rate of Return?

Many advocates of social security privatization argue that rates of return under a defined contribution individual account system would be much higher for all than they are under the current social security system. This claim is false. The mistake comes from ignoring accrued benefits already promised based on past payroll taxes, and from underestimating the riskiness of stock investments. Confusion arises because three distinct reforms are muddled. By privatization we mean creating individual accounts (which could, for example, be invested exclusively in bonds). By diversification we mean investing in stocks, and perhaps other assets, as well as bonds; diversification might be undertaken either by individuals in their private social security accounts, or by the social security trust fund. By prefunding we mean closing the gap between social security benefits promised to date and the assets on hand to pay for them. Any one of these reforms could be implemented without the other two. If the system were completely privatized, with no prefunding or diversification, the social security system would need to raise taxes and/or issue new debt in order to pay benefits already accrued. If the burden were spread evenly across all future generations via a constant proportional tax, the added taxes would completely eliminate any rate of return advantage on the individual accounts. We estimate that the required new taxes would amount to about 3 percent of payroll, or about a quarter of all social security contributions, in perpetuity. Unlike privatization, prefunding would raise rates of return for later generations, but at the cost of lower returns for today's workers. For households able to invest in the stock market on their own, diversification would not raise rates of return, correctly adjusted to recognize risk. Households that are constrained from holding stock, due to lack of wealth outside of social security or to fixed costs from holding stocks, would gain higher risk-adjusted returns and would benefit from diversification. If this group is large, diversification would raise stock values, thus helping current stockholders, but it would lower future stock returns, thus hurting young unconstrained households. Overall, since the number of truly constrained household is probably not that large, privatization and diversification would have a much smaller effect on returns than reformers typically claim.

Social Security Investment in Equities I: Linear Case

Social Security trust fund portfolio diversification to include some equities reduces the equity premium by raising the safe real interest rate. This requires changes in taxes. Under the hypothesis of constant marginal returns to risky investments, trust fund diversification lowers the price of land, increases aggregate investment, and raises the sum of household utilities, suitably weighted. It makes workers who do not own equities on their own better off, though it may hurt some others since changed taxes and asset values redistribute wealth across contemporaneous households and across generations. In our companion paper we reconsider the effects of diversification when there are decreasing marginal returns to safe and risky investment. Our analysis uses a two-period overlapping generations general equilibrium model with two types of agents, savers and workers who do not save. The latter represent approximately half of all workers who hold no equities whatsoever.

Disinvesting in America? the legacy of consumption policy in the 1980s

This article traces patterns of consumption, low productivity, debt accumulation and slow economic growth. Rather than calling for an increased emphasis on market and corporate incentives, the author calls for increased public investment. He favors particularly increases in scientific research and development and technology, in public works to rebuild the infrastructure, and calls for a public administration associated with increased investment in government. The New Deal and the Great Society established the foundations of the public policy and administration of consumption—income transfer, entitlement, loan, loan guarantee, credit, subsidy, tax expenditure, and related programs designed to maintain or improve the income levels and social and economic well being of many elements of the United States population. Such programs now constitute approximately 50 percent of the federal budget. In the late 1980s, the United States entered into a new international economic, technological, and demographic order in...

Asset Allocation Under Partial and Complete Privatization of Social Security Contributions

Social Security reform has focused on allowing individuals to choose where to invest a portion of their retirement contributions as a means of avoiding insolvency of the retirement system. Chilean reforms in the early 1980s have demonstrated, at least for a developing and immature stock market, that privatization can be an effective way to increase returns on retirement savings. Mature security markets in the United States provide a large variety of potential investments that appear to be attractive alternatives to the Social Security trust fund's implied rate return of 2.3%. These returns have a zero variance, which still makes them a good choice when compared to more volatile alternatives in the event of full or partial privatization of Social Security contributions assuming assets are allocated according to mean variance efficiency analysis.

The Market to the Rescue? The Promise - And the Price - Of the New Social Security Investment Proposals

Three new plans for reforming Social Security financing recommend investing a portion of future payroll deductions in the financial markets. The plans aim to shore up Social Security's trust fund, improve individual returns, and enhance national saving. This analysis concludes, however, that the effectiveness of the plans would depend largely on individual saving and investment decisions, government fiscal policy, and developments in the financial markets. In addition, the proposed reforms could expose the program to unprecedented market risk.

Should Women Support the Privatization of Social Security?

years ago very few people took proposals to privatize social security seriously. Today such proposals are being given very serious consideration. Attention to this issue has increased with the recent release of three alternative proposals for reform by the Advisory Council on Social Security, two of which call for partial privatization.1 In view of this, it is time to remedy the near silence with respect to the implications for women. Many privatization proposals, including those recently made by the Advisory Council, would have bad economic consequences for women. The Maintenance of Benefits plan, the least controversial of the three proposals by the Advisory Council, suggests that 40 percent of the Social Security Trust Fund be invested in the stock market. It calls for a number of other less controversial changes that translate into modest benefit cuts and tax increases, but it

The Economics of Prefunding Social Security and Medicare Benefits

This paper presents a detailed analysis of the economics of prefunding benefits for the aged, focusing on social security but indicating some of the analogous magnitudes for prefunding Medicare benefits. We use detailed census and social security information to model the transition to a fully funded system based on mandatory contributions to individual accounts. The funded system that we examine would permanently maintain the level of benefits now specified in current law and would require no new government borrowing (other than eventually selling the bonds that are officially in the social security trust fund). During the transition, the combined rate of payroll tax and mandatory saving rises initially by 2 percentage points (to a total of 14.4%) and then declines so that, in less than 20 years, it is less than the current 12.4% payroll tax. We estimate the influence of such prefunding on the growth of the capital stock and the level of national income and show that the combination of higher pretax wages...

The Economics of Prefunding Social Security and Medicare Benefits

This paper presents a detailed analysis of the economics of prefunding benefits for the aged, focusing on Social Security but indicating some of the analogous magnitudes for prefunding Medicare Benefits. We use detailed Census and Social Security information to model the transition to a fully funded system based on mandatory contributions to individual accounts. The funded system we examine would permanently maintain the level of benefits now specified in current law and would require no new government borrowing (other than eventually selling the bonds in the Social Security trust fund). During the transition, the combined rate of payroll tax and mandatory saving rises at first by 2 percentage points (to a total of 14.4 percent) and then declines so that in less than 20 years it is less than the current 12.4 percent payroll tax. We estimate the impact of such prefunding on the growth of the capital stock and the level of national income and show that the combination of higher pretax wages and lower payroll taxes could raise wages net of income and payroll taxes by more than 35 % in the long run. We also discuss distributional issues and the way that the poor can be at least as well off as under Social Security. A stochastic simulation shows that a small increase in the mandatory saving rate would reduce the risk of receiving less than the scheduled level to less than one percent. Separate calculations are presented of the value of the 'forward-looking recognition bonds' and 'backward-looking recognition bonds' which the government might issue if it decides not to pay future social security benefits explicitly.

Investing U.S. Social Security Trust Fund Assets in Private Securities

This paper examines the macroeconomic and distributional consequences of a policy change, other things being equal, that would allow U.S. Social Security trust fund assets to be invested in private securities. Improving the expected return to trust fund assets, by shifting these from government bonds to private securities, tends to reduce (increase) the future claim on national output of the current (future) working population. The effects on aggregate saving and future output depend on whether current workers interpret this policy change as affecting their future Social Security benefits.

Investing U.S. Social Security Trust Fund Assets in Private Securities

This paper examines the macroeconomic and distributional consequences of a policy change, other things being equal, that would allow U.S. Social Security trust fund assets to be invested in private securities. Improving the expected return to trust fund assets, by shifting these from government bonds to private securities, tends to reduce (increase) the future claim on national output of the current (future) working population. The effects on aggregate saving and future output depend on whether current workers interpret this policy change as affecting their future Social Security benefits.

It’s Time to Privatize Social Security

According curity system's board of trustees, social security will be insolvent by 2029, one year sooner than was stated in last year's report. This represents the eighth time in the past ten years that the insolvency date has been brought forward. But even this does not provide the full story of social security's looming crisis. The important date is 2012. Social security taxes currently bring in more revenue than the system pays out in benefits. The surplus theoretically accumulates in the Social Security Trust Fund. However, in 2012 the situation will reverse. Social security will begin paying out more in benefits than it collects in revenues. To continue meeting its obligations, it will have to begin drawing on the surplus in the Social Security Trust Fund. However, the trust fund is really little more than a polite fiction. For years the federal government has used the trust fund to disguise the actual size of the federal budget deficit, borrowing money from the trust fund to pay current operating expenses and replacing the money with government bonds essentially an IOU.

A long-run simulation model for analysing social security retirement policies

This paper analyses social security retirement policy using a simple long-run simulation model which incorporates lifecycle consumption behaviour. Three policy alternatives are considered: 1 a validation policy in which the retirement of the baby boom generation is partially financed by an increase in national saving brought about by the projected build-up in the social security trust funds; 2 an offset policy in which national saving does not increase because the social security trust fund build-up is offset by increases in deficits of other government programmes; 3 a policy of cutting social security taxes and returning the system to pay as you go. Each policy is judged by how it affects the well-being of age cohorts alive at the start of the simulation.

Labor's capital: the economics and politics of private pensions

Part 1 Introduction - actors, paradigms, and pensions: pensions as efficient contracts - the neoclassical perspective pensions as worker control devices - the Marxist perspective pensions as social institutions - the institutionalist perspective pension policy issues. Part 2 The pension idea: who should provide retirement income - government or business? who got to retire? types of government schemes what employers want from pensions intitial employer pension goals characteristics of the early employer pensions outcomes and contradictions - the new private pension system. Part 3 Social insurance with a union label: unions, pensions, and segmented labour markets union influence on pension coverage outcomes and contradictions - pension bargaining without conflict. Part 4 The employer pension system - distribution and moral hazard: pensions and moral hazard external factors - distribution of pension plan coverage and benefits internal factors - how do pensions affect workers within a plan? a theory about the pension contract portable pensions, SEPs, and distributional equity outcomes and contradictions - toward a mandatory pension system. Part 5 Corporate uses of pension funds: pension contracts and firm default government and the corporate use of pension plans outcomes and contradictions - challenges to corporate use. Part 6 Pension funds and financial democracy: economic power labor's acess to pension fund management competition for the control of capitl prospects for worker capitalism outcomes and contradictions - ownership and strategies. Part 7 What makes a good private pension system?: requirements for an optimum pension system is the pension system consistent with government goals? federal pension law - 1920-1989 most of the costs and some of the benefits of private pensions outcomes and contradictions - the costs of volunteerism. Part 8 Directions for private pension reform: outlook for employer pension policies in the 1990s the likely direction of government policies democratizing the social security trust fund resolving the private pension contradictions.

SOCIAL SECURITY INVESTMENT POLICY AND CAPITAL FORMATION

Large recent surpluses in the social security trust fund accounts provide the potential to increase overall national saving and capital formation. However, these surpluses instead have allowed politicians to increase the non‐social security deficit and government consumption.This paper argues that investing the trust funds in private assets could bring into focus the magnitude of the non‐social security deficit and force Congress to cut it. Evidence presented here indicates that the trade deficit, output, and monetary policy are systematic macroeconomic variables that affect relative asset prices. The evidence also supports arguments of Nordhaus and others that a change in trust fund investment policy could lower the trade deficit, raise output, and produce looser monetary policy, thereby increasing Tobin's a and, thus, capital formation. Investing the trust funds in private assets could increase national investment and give the baby‐bust generation more capital to use in producing goods and services for themselves and for retired baby‐boomers.

Tax Inequality Caused Our Ballooning Budget Deficit

Two hundred years of our nation's history reveals the quintessential American hope and expectation that each generation will be better off economically than its parents. The decade of the 1980s was a most troubling one for our country because it dashed that hope for the first time. Not only has the dream of self-betterment been put on hold for most members of the current generation, but it also has been systematically undermined for the next as well. More and more of our nation's wealth has been dissipated, as we have borrowed against tomorrow to pay for current spending. Less and less ofthat spending has gone into government programs that benefit average families or into the investments we need both private and public to improve our standard of living and to secure our children's future. At the outset of the 1980s, our government undertook a reckless experiment in what was called supplyside economics. ' ' It should have been labeled * 'Borrow and Squander. In the past decade, federal borrowing averaged 4.2 percent of the gross national product, by far the highest sustained level outside of wartime in our nation's history. As a result, we have saddled ourselves and our children with an additional $2 trillion in debt, a large share of which is owed to foreign investors. The radical buildup of government debt in the Reagan-Bush era is a sharp break from the past (Figure 1). Although budgets have rarely been completely balanced, every post-World War II administration until President Reagan's succeeded in reducing the national debt as a share of the gross national product. (By the end of the 1970s, the debt had dropped to only a quarter of GNP.) But we now face a national debt that exceeds half the GNP a level unseen since the mid-1950s, when we were still paying off the cost of World War II. In fact, counting the growing portion of the debt that is owed to the Social Security trust funds, the debt now approaches a staggering two-thirds of the GNP.

The Future of Social Security: An Update

Keith M. Carlson examines the current financial status of the Social Security system and addresses the concern about its long-run viability. Carlson focuses on the 1990 annual reports of the Social Security trust funds and compares the projected surpluses with those prepared following the enactment of the 1983 Social Security amendments.

Can the Social Security Trust Fund Contribute to Savings?

Can the Social Security Trust Fund Contribute to Savings?

Social Security, Demographic Trends, and the Federal Budget

This paper considers the implications of the prospective aging of the U.S. population for the social security system and concludes that the large and growing cashflow surpluses of the social security trust funds should be saved to help insulate living stands against this change. A number of illustrative scenarios are presented in which the impact of pursuing this policy is analyzed within the context of a growth model incorporating the demographic projections of the Social Security Administration. If the current unified budget framework, which includes Social Security trust fund flows, is retained, the suggested policy would require that fiscal surpluses be achieved.