There’s a movement to have the Social Security Trust Fund partially invested in stocks.


This was the recommendation of a Clinton-appointed federal advisory commission, and we will all be hearing more about it in the months to come.

The idea is not to have Uncle Sam picking stocks and trying to outsmart, say, well, you or me. The idea (at least so far) is to have perhaps three-eighths of these funds invested in a broad, broad index of the market as a whole.

Granted, the Trust Fund is not as large as you might imagine. It’s largely a “pay as you go” kind of retirement system, where all our contributions used to go right back out to our grandparents, with nothing put away for our own retirements.

In the past decade or so, however, we’ve begun collecting more than we need to pay out right now, hoping to build a cushion for when the baby boomers are retired, with too few workers to support them all.

That cushion has been growing fatter and fatter (although not so much as to solve the long-term problem), and it’s all invested in U.S. government bonds. After inflation, the Treasury bonds can be expected to earn barely more than 2%, while stocks have historically earned more like 6%. So, the thinking goes, why not juice up the return on this money?

Clearly, the injection of tens of billions of new capital in the market, if it happens, will have effects. One obvious one: raising stock prices higher than they otherwise would have been (more demand, same supply, equals higher prices). But nearly as obvious: higher borrowing costs to the Treasury (less demand for Treasury bonds, same supply, equals lower prices for bonds, which means higher interest rates).

I’m not saying it’s a bad idea, just intriguing. I like to think if it’s done at all it will be done prudently. With a Treasury Secretary like Robert Rubin, that’s likely.

You don’t want to get the government into the business of trying to manage the stock market. Still, the market might be even less prone to unreasoning panic than it is today if people knew that on steep sell-offs the Trust Fund might take the opportunity to scoop up an extra $50 billion or $100 billion of securities.

And it might even help keep the market from reaching dangerous over-valuations if people knew that the Trust Fund would occasionally “take profits,” since it has, after all, no capital gains tax to worry about.

One can see all sorts of potential for abuse and mismanagement. One can also see off to the distant future when a lot of the surplus might have to be sold off to support those Baby Boomers. What kind of long-term drag would that be on the U.S. stock market?

(And Heaven help us if we start awarding contracts to high-priced money managers. You can see the potential for cronyism and boondoggle in that. No, the “transaction costs” on these investments should be just a hair above zero.)

And then there’s the question of why we should even limit this to the U.S. stock market? Overseas markets, in countries growing faster than we are, may do even better than our own. To the extent the Trust Fund could profit by stepping in to soften some other market’s panic — buying when prices have plunged — it could be a potent force in global economic foreign policy at the same time as it aided the world economy and piled up more loot for retirees. So perhaps a small portion of the investible funds should have the flexibility to go abroad, odd as that may sound at first.

In trying to scope out something so new and potentially impactful (is that a word? well, it should be), it’s good to keep perspective. Here’s mine: this money isn’t going to come from nowhere, it’s going to mean a shift from demand for Treasuries to a demand for stocks. Who will buy the Treasuries we no longer do? How high will interest rates have to climb to attract other purchasers? One potentially benign answer — conceivably — is “no one.” If we’re really lucky, budget deficits will shrink and the Treasury’s need to borrow will moderate. Indeed, the shift of some Social Security money from debt to equity could even encourage a bit more economic growth (which could shrink the deficit further).

I think I’m getting a little carried away. But this thing is pregnant with possibilities. Stay tuned.

Tomorrow: Business Anecdotes


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