Social Security and the Stock Market
Center for Retirement Research at Boston College, October 26th, 2006
The U.S. retirement income system faces an enormous challenge as the
transition to a much older society begins. Fewer employers sponsor traditional
defined benefit pension plans. Their replacement, the now dominant defined
contribution (e.g., 401(k)) plans, are failing to produce the accumulations that
baby boomers will need for a secure retirement. And the backbone of the
retirement income system, Social Security, faces a long-term shortfall. This
situation has policymakers looking for new funding options.
One such
option gaining support is investing a portion of Social Security funds in
potentially higher-yielding equities. Munnell and Sass explore whether equities
could help solve the woes facing the U.S. retirement income system in general,
and the Social Security shortfall in particular. They examine the experiences of
three nations that added equities to the investment mix of their retirement
systems—the U.K., Australia, and Canada. As these experiences show, while
equities promise higher returns than government bonds, how they are
implemented—as add-ons, carve-outs, or as trust fund supplements—matters
greatly.
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