A comparison of investment in social security to investment in market benchmark alternatives

Many have suggested from time to time that had social security retirees been allowed to Invest the same amounts contributed to the social security program In alternative Investments, then some retirement annuities might have been larger. This suggestion implies that market valuations of contributions are needed to adequately resolve the Issue. In this research valuations of hypothetical levels of contributions were derived using yields from market benchmark alternatives as the valuation rates. In particular, benchmark surrogates for the risk-free asset and market portfolio of risky assets were used.

The results of the research demonstrate that returns from Investment In social security are superior to returns from Investment In the risk-free surrogates for all hypothetical retirees. Also, returns from Investment In social security are generally superior to returns from Investment In the surrogates for the market portfolio of risky assets. This last result was particularly surprising In view of the assumed risk-free nature of social security benefits.

A major policy Implication of the results of this research Is that a market-based norm would be more desirable for assessing the achievement of Individual equity In the social security benefit structure than what is currently used. Similarly, an external norm is also needed for assessing the achievement of social adequacy.