NCPA - National Center for Policy Analysis

Risks Of Government Investing

January 19, 1999

If Social Security funds invested in stocks and bonds are controlled by a government appointed investment board, workers can expect lower returns, warn researchers.

Analysts have compared the performance of so-called economically targeted investments (ETIs) made by state pension funds with that of traditional investments. John R. Nofsinger of Marquette University finds that such policies reduce average annual returns by more than 1.5 percent annually. Others have determined that these investments have returns that average between 1.0 percent and 2.5 percent below those of funds that operate in the best interest of workers.

Losses by government employee pension funds have been substantial, according to the Heritage Foundation. For example,

  • The Missouri State Employees' Retirement System venture capital fund for new businesses was shut down after three years following poor returns and two lawsuits.
  • Pennsylvania school teachers and state employees saw the $70 million of their fund invested in a new plant for Volkswagen lose more than half its value.
  • The Connecticut State Trust Fund poured $25 million of workers' money into Colt Manufacturing, a local company that went bankrupt three years later.
  • Total losses by the Kansas Public Employees' Retirement System from ETIs will total between $138 million and $236 million.

States have also used pension funds to help them out of financial trouble. For example, Illinois transferred $21 million of workers' money to the state's general budget. Furthermore, New York State and City pension funds were pressured in 1975 into buying bonds to avert New York City's bankruptcy, and, in 1976, into buying bonds to bail out four state agencies.

An independent study estimates that non-economic investing by government-controlled pension funds resulted in more than $28 billion in losses between 1985 and 1989.

Source: Daniel J. Mitchell, "Why the Government Should Not Invest Americans' Social Security Money," Backgrounder No. 240, December 23, 1998, Heritage Foundation, 214 Massachusetts Avenue, N.E., Washington, D.C. 20002, (202) 546-4400.


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