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Impact of Stocks on Retirement System

U.S. stock market performance has implications for our entire retirement system – not just your 401(k).

Three studies addressing the big-picture relationships between the market and retirees’ financial security were produced in 2017 by the Center for Retirement Research, which sponsors this blog. Here are summaries of each one:

  • State and Local Pension Plan Funding Sputters in FY2016 – Public pension plan returns were very weak in fiscal year 2016. But even though stock market performance improved in 2017, it will be difficult to compensate for the plans’ funding shortfalls over the long-term: “To achieve more meaningful progress,” the researchers concluded, state and local governments “need to establish contribution levels that will actually reduce unfunded liabilities.”
  • How Will More Retirees Affect Investment Returns? – This interesting paper reviews the effect of the competing demographic forces driving investment returns. This is an extremely complex economic calculation, but the upshot is that our retirement accounts are receiving less interest and dividend income per dollar invested.
  • What are the Costs and Benefits of Social Security Investing in Equities? – Young adults are told to throw their 401(k) contributions into the stock market and forget about them for a few decades. That’s because stocks are riskier but generally outperform bonds. The Social Security Trust Fund, which currently invests only in bonds, is just another long-term investor, and projections show that its finances would also benefit from investing in stocks.

The latter two studies reported herein were performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

One Response to Impact of Stocks on Retirement System

  1. John Dewey says:

    The Social Security does not really “invest” in bonds. The Special Purpose T-Bills cannot, by law, be sold to anyone in order to raise dollars to invest in equities. These T-Bills are just IOU’s which our government says future taxpayers will pay back to Social Security.

    Suppose the Social Security Administration could legally redeem its T-Bills and demand cash from the U.S. Treasury in order to invest in equities. Where would the Treasury get the cash to give to the Social Security Administration? The U.S. government is already operating at a deficit. Treasury would have to increase borrowing in order to come up with the cash. And it would be a lot of borrowing.

    There are no funds in the Social Security Trust Fund. Just IOU’s from one part of the federal government to another part of the federal government. Before you accuse me of nonsense, please remember that all bonds, private or public, are exactly IOUs. The difference between corporate bonds and T-Bills is that the former has an identified source for repayment of borrowing: the operating profits of the corporation’s business. The federal government has not identified the source for repaying the $2.8 trillion it has “borrowed” from the Social Security Trust Fund.

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