Diversifying Trust Fund Investments

Background

By law, the reserves in Social Security’s trust funds cannot be invested in corporate equities and bonds, real estate, or most other publicly or privately traded assets. Rather, the reserves must be invested in US Treasury securities. These are low risk but generally yield lower average returns than private equities over the long term.

Many Social Security experts have proposed investing a portion of the trust fund reserves in instruments other than US government securities to increase return rates for the trust funds. Pooling investments reduces risk and keeps transaction and reporting costs to a minimum, thus producing higher net returns than similarly invested individual accounts.

However, some policy experts have expressed concerns that political considerations could drive government investment decisions, that the government might interfere in corporate governance, or that an influx of so much government money into the stock market might interfere with or skew the market.

Such concerns can be addressed through careful structuring. Alternative investments could be managed by an expert investment board that contracts with private-sector passive-equity index managers. In fact many state government pension plans already invest in private securities.

Diversifying Trust Fund Investments: Policy

Conditions for investing trust funds assets

In this policy: Federal

If changes are made to Social Security that extend the life of the trust funds, Congress could authorize the investment of a portion of the Social Security reserves in investments other than Treasury securities. These investments should be made by designated fiduciaries on behalf of the trust funds and for the sole benefit of the trust funds.

The fiduciaries should be responsible for monitoring investment managers and assessing the adequacy of the investment returns with due regard for the risk to the plan’s assets.

Proposals for diversifying investments must:

  • be insulated from political influence and structured to protect the integrity of the fund and issuer;
  • minimize risk while maximizing yield; and
  • prevent interference with or negative effects on markets, corporate governance, economic growth, and productivity.