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

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  • Harris, Amy Rehder
  • Meyerson, Noah
  • Smith, Joel

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 Budget 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

  • Harris, Amy Rehder & Meyerson, Noah & Smith, Joel, 2001. "Social Insecurity? The Effects of Equity Investments on Social Security Finances," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(3), pages 645-668, September.
    • Handle: RePEc:ntj:journl:v:54:y:2001:i:3:p:645-68
    DOI: 10.17310/ntj.2001.3.15
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    References listed on IDEAS

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    1. Campbell, John Y. & Feldstein, Martin (ed.), 2000. "Risk Aspects of Investment-Based Social Security Reform," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226092553.
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    Cited by:

    1. Diana H. A. Tsai, 2005. "Knowledge Spillovers and High‐technology Clustering: Evidence from Taiwan's Hsinchu Science‐Based Industrial Park," Contemporary Economic Policy, Western Economic Association International, vol. 23(1), pages 116-128, January.
    2. John B. Shoven & Sita N. Slavov, 2006. "Political Risk Versus Market Risk in Social Security," NBER Working Papers 12135, National Bureau of Economic Research, Inc.
    3. Josh O’Harra & John Sabelhaus & Michael Simpson, 2004. "Overview of the Congressional Budget Office Long-Term (CBOLT) Policy Simulation Model: Technical Paper 2004-01," Working Papers 15188, Congressional Budget Office.
    4. Amy Rehder Harris & John Sabelhaus & Michael Simpson, 2005. "Social Security Benefit Uncertainty under Individual Accounts," Contemporary Economic Policy, Western Economic Association International, vol. 23(1), pages 1-16, January.

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