A report prepared for Financial Executives Institute''s Committee on the Investment of Employee Benefit Assets (CIEBA) by economists at four leading investment firms (Goldman, Sachs & Co., Morgan Stanley Dean Witter & Co., J. P. Morgan Investment Management, and INVESCO Global Strategies) finds that investing a portion of the Social Security trust funds in the equities market would extend the program's solvency by 4 to 14 years, but no longer. And, although the amount of government money invested in the private markets seems large, the overall impact on financial markets and the economy would be small, the report concludes.
The report was released June 25 in Washington, DC, at a symposium cosponsored by CIEBA and the Employee Benefit Research Institute (EBRI). CIEBA is a national voice for corporate financial executives who oversee the investment of over $1 trillion in retirement plan assets. Titled Implications of Investing Social Security Funds in Financial Markets, the report includes the following key findings:
-- Since 1926, equities have outperformed U.S. Treasury bonds by roughly
6 percent annually. However, the future "equity risk premium," or
additional return on investing in stocks, would probably be only about
2 percent, due to the currently high level of the U.S. equity market.
In other words, trust fund balances could be expected to grow by
holding equities, but not by as much as implied by historical market
performance, or as assumed by the 1994-96 Social Security Advisory
Council, the Clinton administration, or equity investment advocates in
-- Equity investing is not sufficient to prevent the impending problems of
the Social Security trust funds. Using the OASDI Trustee's
intermediate-cost assumptions about future economic performance, the
trust funds' solvency would only be extended by equity investments by
7 years, to the year 2041. The report notes that if there were a
20 percent to 30 percent downturn in the equities market during the
next five years, trust fund insolvency could actually occur one or two
years earlier than projected today.
-- The strategies of several large public pension funds are included in
the report. A recommendation is also made that the broadest reasonable
definition of U.S. equity should be used to implement any Social
Security equity investment program.
"The research provides a sound framework for debate over the merits of private investment of Social Security funds," notes Allen Reed, CIEBA chairman and president of General Motors Investment Management Corporation. "In most expected scenarios, the choice to diversify into equities will not yield an overall return which eliminates the insolvency problem, unless combined with other measures that increase national savings."
Adds Britt Harris, president of GTE Investment Management Corporation and Chairman of CIEBA's Investment and Benefits Finance Subcommittee, "Private investment provides no panacea to the long-term solvency problem, and both the risks and opportunities need to be carefully evaluated."
CIEBA was formed in 1985 to provide a nationally recognized forum and voice in Washington exclusively for ERISA-governed corporate pension plan sponsors on current fiduciary and investment issues. Its 154 member companies collectively manage the investment of over $1 trillion in retirement plan assets on behalf of more than 15 million plan participants and beneficiaries. Financial Executives Institute, the leading advocate for the views of corporate financial management, is a professional association of 14,000 senior financial executives from 8,000 U.S. and Canadian companies. For more information, visit http://www.fei.org/.
EBRI is a private, nonprofit, nonpartisan public policy research organization based in Washington, DC. Founded in 1978, its mission is to contribute to, to encourage, and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI does not lobby and does not take positions on legislative proposals. EBRI Social Security studies can be accessed online at http://www.ebri.org/.
SOURCE: Financial Executives Institute
Contact: Jacque Johnson of CIEBA, 202-457-6205; or Bill Pierron of
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