NCPA - National Center for Policy Analysis

Government Investment A Bad Idea

March 22, 1999

President Clinton has proposed committing "60 percent of the budget surplus for the next 15 years to Social Security, investing a small portion in the private sector just as any private or state government pension would do." But policy analysts warn that while state and local government pension funds usually do invest in stocks, politicians have often used that money for political purposes. And because of the way government invests, having the government invest Social Security funds would not solve the system's financial problems.

For instance, according to a December 1998 Congressional Research Service (CRS) study of a plan to invest up to 50 percent of the trust fund in stocks.

  • The CRS assumed that the trust fund would earn about 6.4 percent annually on its stock market investment, but it would need 10.7 percent to resolve Social Security's long- term funding crisis.
  • By contrast, the Employee Benefit Research Institute estimates that private pension assets earned 12.1 percent per year between 1990 and 1995, about twice the expected return were the federal government to invest the money.
  • Thus, as long as government investments are prudent and conservative, they won't earn as much as Social Security needs.

Also, unlike public pension funds, private pension funds come under the Employee Retirement Income Security Act (1974), meaning fund managers have a legal obligation to maximize returns on investments. Thus, like many public employee pension funds, the federal government would probably turn to Economically Targeted Investments (ETIs), selected for their economic benefits apart from their investment return. A 1995 study found that such pension funds underperform others by 1.18 to 2.10 percentage points.

The Clinton plan would transfer between $650 billion and $1.2 trillion into stocks over the next 15 years, or about 4 percent of the U.S. market. With that much money at politicians' discretion, it would be too tempting to use the funds to do what's good for political reasons, rather than do what's right for America's workers.

Source: Merrill Matthews Jr. (NCPA Vice President of Domestic Policy), "Should the Federal Government Invest Social Security Trust Funds?" Brief Analysis No. 286, March 22, 1999, National Center for Policy Analysis, 12770 Coit Rd., Suite 800, Dallas, Texas 75251, (972) 386-6272.

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