Stocks always return more than Treasury Bonds. So why doesn’t Social Security invest the trust funds in stocks rather than Treasury bonds?

The first reason is simple. The government wanted Social Security to be free from accusations of favoritism. Why should public businesses have access to government capital, when private capital doesn’t have that same advantage?  The second reason is also simple: do we want the government to be an owner of a large percentage of the businesses of the country?  Do you want the government to have even more influence on businesses than activist investors do?

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Social Security
By US Government (Social Security Administration) [Public domain], via Wikimedia Commons
The third reason is complex.  Do you want to mess up the stock market?  A large dedicated buyer would drive the market up to levels where future returns would be very low, much lower than at present.  Very marginal businesses would go public to take advantage of the dumb capital.

Far from earning more money for Social Security, the investment would put in the top of the market.  There would be a generational top where the brightest investors would leave the market,,  Future returns would be low.

Not that anyone significant is suggesting it at present, but it is wiser to keep governments out of business management.  Don’t reach for false gains in investment performance if the price is government involvement in the details of business.

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One more note: all of the benefits of Social Security are based off of labor earnings, not capital earnings.  Most taxes are collected from labor income.  That’s why Treasury bonds make sense — it is a neutral asset that is similar to those who receive the benefits.  Treasury bonds are as broad-based as those who receive benefits.

Article by David J. Merkel, CFA, FSA - The Aleph Blog