Merits of Social Security Investment in the Market

Investing social security in the market?  That sounds an awful lot like "privatization!"  No?  No.  There's an idea floating around - catching attention from former SEIU President and member of the President's deficit commission (formally the National Commission on Fiscal Responsibility and Reform) Andy Stern - to gradually invest a portion of the social security trust fund in the stock market.  This investment would be done by the government, not individuals, unlike the private accounts called for by Republicans.

Let me make an argument on the merits.  The argument is three-fold: first, it's very important to understand why the government investing part of the social security trust fund in the market is different from individuals investing portions of their own social security taxes.  Second, over the longer term, the earning potentials are large and can help close the long term structural deficit in social security.  Finally, this is not a new concept.  Canada and other western and Asian countries already utilize the market to invest their public pension funds, and states across the US do the same.

Another important thing: I am looking at this proposal from the perspective of what effects it will have on social security, period.  The morality or immorality of Wall Street having extra investment dollars is not a factor in this piece, period.


Individual Accounts vs. Government Investment

Andy Stern was pretty clear about this approach:
There were several ways to bring the fund into balance, he said, but one that he favors consists of "investing some percentage of government money in the stock market, as they do in Canada. Not individual taxpayer money, but government money." 
The Republican idea of letting individuals take out of the social security system part of their social security taxes and investing it in the market would have a few drawbacks: first, it would reduce the money coming into the social security system and thus reduce guaranteed benefits.  As a result, those who lose money in the stock market - and would thus be in the greatest need for the benefits - would actually have less benefits.  The poor - who have little other money to invest in the market - would stand to lose the most if they lose their social security investment account.

Second, individual investments are far shorter term than government investment, by nature, and therefore less likely to recover fully from a market downturn.  Because of the vast amount of money available in the social security trust fund, the Social Security Administration can afford to leave a good deal of money in the market for 50-70 years or more, a task impossible for an individual.  Furthermore, given the methods of financing available to the government, it can leave temporarily non-performing investments in the market no matter what the time, something an individual approaching retirement age will not be able to do.

Also because of the vast amount available, SSA can spread the risk to the extent individual investors cannot (and often do not) do.  Individuals are often influenced by brokers who are more interested in a commission check than the client's retirement nest egg.


Long Term Earning Potentials

This is not an idea out of the right field.  Many liberal policy experts and advocates have endorsed the idea.
Allowing Social Security to invest some of its fund does have some progressive backing. "I don't think it's necessarily a bad idea," said Dean Baker, an economist with the liberal-leaning Center for Economic Policy and Research. "If he's talking about getting money out of the trust fund for that purpose, I could live with it. You'd get a higher return now that stocks are falling."
Also on-board is the co-director of Social Security Works, Nancy Altman.  Mind you, Social Security Works is the organization employs Alex Lawson - the hero of the left for frustrating and catching Republican co-chair of the Commission on a few gaffes (but they mostly had a substantive discussion).  She worked with the late Robert Ball to have come up with the idea originally, and Ball worked for social security since almost its inception.
The late Robert Ball, a New Deal liberal who first began working for Social Security in 1939 and helped negotiate reform through the Greenspan commission in the early 1980s, championed the idea, suggesting that gradually investing a sliver of the fund each year until around 15 percent was put in would address roughly a quarter of the projected shortfall.

Nancy Altman, co-director of Social Security Works, which is fighting cuts to the program, previously worked with Ball on the plan, which became known as the Ball-Altman Proposal. She told HuffPost that if done cautiously, investing in the market comes with little risk because of the long-term time frame of the investment.
Dean Baker estimates that government funds invested in the market would have a 6-7% annualized return over the long term.  That is about double of the roughly 3% return social security trust fund bonds enjoy now.

Public Pension Funds Do It Already

Canada, our neighbors to the north, invests part of their public pension fund in the stock market.  The Canadian public pension fund is so popular that AARP International called it a model of reform.  Canada's public pension funds invested in the market made a 15% return in the year that ended on March 31.
The Canada Pension Plan Investment Board, which invests the assets of the country's national pension fund, said its portfolio returned nearly 15% in the year ended March 31, while net assets rose 21% to 127.6 billion Canadian dollars ($122.18 billion), a hair under its record in June 2008. Executives said the portfolio returned almost 23%, excluding the effects of the strengthening Canadian dollar, which reduces the value of the roughly 50% of assets the fund holds in other currencies. 
Globally, government controlled public investment funds are making a much faster recovery from the market crash of 2008.
Private funds have made up nearly half of the hit they took in the market nightmare of 2008, the Organisation for Economic Cooperation and Development says on the basis of sample data for December 2009.

This means that at the end of last year, private investment funds had assets totalling 16.8 trillion dollars (13.0 trillion euros). [...]

The market crash in 2008 cut OECD private pension fund values by 3.5 trillion dollars. By December, a stocks rally had retrieved about 1.5 trillion dollars of this but the boost has petered out.
The only notable exception is California - whose public employee's pension fund (not public pension fund) suffered a significant loss in the last year.  Maryland's state pension fund, in contrast, made a 14% gain last year.  The point is not to demonstrate that public pension funds will make these big gains every year - but rather to show that public pension funds, with staying power, are able to recover from losses quickly and over the longer term, make money.

So, despite the foot-stomping ideological opposition from the left-authoritarian and demagogue Jane Hamsher, investing part of social security in the stock market can indeed work and close part of the long term shortfall.  That is something worth exploring - and the deficit commission would do well to pay attention to it.