Objectives, Scope, and Methodology

To better understand the implications of the Social Security trust fund investing in the stock market and of the federal government owning and managing a portfolio of stocks, we considered three different perspectives: the trust fund, the U.S. economy, and the federal budget. At the request of the Senate Special Committee on Aging, we specifically addressed the impact of government stock investing on (1) the investment earnings, investment risks, and financial solvency of the Social Security trust fund, (2) national saving and the financial markets, including implementation issues presented by the government selecting and managing its stock portfolio, and (3) the federal budget and federal debt. Investing in the stock market offers the prospect of higher returns but greater risk. The higher returns possible with stock investing would allow the trust fund to pay benefits longer, even without other program changes. Stock investing, by itself, is unlikely to solve Social Security’s long-term financing problem. If stock investing is implemented in isolation from other program changes, the trust fund would face the certain need to liquidate its assets to pay benefits with no certainty of what future stock prices would be. In exchange for the prospect of higher returns, the trust fund must accept greater risk. Social Security Trust Fund Would Be Vulnerable to Stock Market Risk

Higher stock returns could delay the trust fund’s exhaustion, but, without other program changes, the trust fund inevitably will have to liquidate its stocks to pay benefits. Any higher returns earned by the government would otherwise have accrued to other investors. Benefits and Limitations of Stock Indexing

Proposals for government stock investing typically recommend investing in a broad-based stock index to diversify the government’s stock portfolio, reducing the likelihood of concentrating investments in individual companies, and to reduce administrative costs. Effects of Government Stock Investments on the Federal Budget and Fiscal Policy

Under current budget scoring rules, in the short term stock investing would increase the reported unified deficit or decrease any reported surplus, because stock purchases would be treated as budget outlays. Any money used to purchase stocks would no longer be invested in Treasury securities, reducing the Treasury’s available cash and making the resulting budget measure look more like the on-budget deficit that excludes Social Security’s finances. Although stock investing would increase federal debt held by the public, it would not by itself significantly affect national saving. However, any such gain to the government would not increase national income. Higher Reported Deficits or Lower Reported Surpluses Could Influence Fiscal Policy

Even though stock investing does not alter the government’s fiscal position, it could indirectly lead to changes in fiscal policy by focusing more attention on the budget imbalance that exists when Social Security’s surplus is excluded.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the implications of having the Social Security Trust Fund invest in the stock market, focusing on the impact of such investing on the: (1) Social Security Trust Fund; (2) U.S. economy; and (3) federal budget.

What GAO Found

GAO noted that: (1) allowing the Social Security Trust Fund to invest in the stock market is a complex proposal that has potential consequences for the trust fund, the U.S. economy and federal budget policy; (2) for the Social Security Trust Fund, stock investing offers the prospect of higher returns but greater risk; (3) higher investment returns would allow the trust fund to pay benefits longer, even without other program changes; (4) however, if stock investing is implemented in isolation, the trust fund would inevitably have to liquidate its stock portfolio to pay promised benefits, and it would be vulnerable to losses in the event of a general stock market downturn; (5) although stock investing is unlikely to solve Social Security's long-term financial imbalance, it could reduce the size of other reforms needed to restore the program's solvency; (6) beyond the clear tradeoff between greater risk for the prospect of higher returns, the government would face other implementation issues inherent in owning and managing a stock portfolio; (7) proposals for government stock investing typically suggest investing passively in a broad-based stock index to reduce both costs and the risk that the government would control individual companies; (8) for the federal budget, stock investing would have the immediate effect of increasing the reported unified deficit or decreasing any reported unified surplus because, under current budget scoring rules, stock purchases would be treated as outlays; (9) any money used to purchase stocks would no longer be invested in Treasury securities, reducing the Treasury's available cash and more clearly revealing the underlying financial condition of the rest of the government; (10) without compensating changes in fiscal policy, stock investing would not significantly alter the impact of federal finances on national saving and the economy; (11) any higher returns earned by the government would otherwise have accrued to other investors; (12) in short, by itself government stock investing would have no appreciable effect on future national income; (13) although the immediate budgetary effect of investing in stocks would be to increase unified deficits or decrease unified surpluses, stock investing might indirectly lead to changes in federal fiscal policy that could increase national saving; and (14) by making Social Security's surplus unavailable to the Treasury, stock investing could focus more attention on the budgetary imbalance that exists when this temporary source of funds is excluded.