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Risk Aspects of Investment-Based Social Security Reform$
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John Y. Campbell and Martin Feldstein

Print publication date: 2000

Print ISBN-13: 9780226092553

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092560.001.0001

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Asset Allocation and Risk Allocation

Asset Allocation and Risk Allocation

Can Social Security Improve Its Future Solvency Problem by Investing in Private Securities?

(p.11) 1 Asset Allocation and Risk Allocation
Risk Aspects of Investment-Based Social Security Reform

Thomas E. MaCurdy

John B. Shoven

University of Chicago Press

Policy makers widely accept that social security faces a long-run solvency problem. The social security trustees publish a seventy-five-year forecast of the Old-Age, Survivors, and Disability Insurance (OASDI) system's finances every year. This chapter examines whether a significant fraction of the whole solvency problem could reliably be solved by having the Social Security Administration invest the OASDI trust fund in higher-yielding private securities. It considers two proposals that maintain a centralized social security system but reallocate its investments in this way. The two proposals, the “maintain-benefits” option of the 1994–1996 Advisory Council on Social Security and the plan recently put forward by Henry Aaron and Robert Reischauer, differ in details, but both rely heavily on the equity premium — the average excess return on stocks over bonds — to reduce the seventy-five-year actuarial deficit of the social security system. The net transaction involved in having the central OASDI trust fund invest a portion of its assets in common stocks is an asset swap. This chapter also considers personal income tax issues and the feasibility of a universal defined-benefit retirement plan.

Keywords:   social security, private securities, solvency, investments, stocks, bonds, actuarial deficit, equity premium, personal income tax, defined-benefit retirement plan

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