Why Social Security Should Not Be Invested In The Stock Market

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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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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.

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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

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.