What Does Increasing Rates Of Return Mean?
The rate of return is the annual profit from an investment. Rate of return is usually expressed as a percent. If you have $100 in the bank on January 1 and you end up with $110 on December 31 of that year, you have a 10% rate of return. (That example assumes no additions or withdrawals from the investment, except for the addition of interest income).
The Social Security funds are deemed to be invested in very low risk, but also low rate of return, US government debt instruments. Different types of investments have different rates of return. Most investments have better rates of return than we are getting in the Social Security trust fund.
If This Solution Works It Will Be Painless!
Imagine this. Social Security taxes don't rise. Social Security benefits don't drop. The Social Security system stays solvent. Everybody is happy. Can this happen? Maybe.
If enough Social Security funds are invested in assets that have better rates of return than what they are now invested in, this dream can come true. Pooled mortgage funds have better rates of returns than government securities. The stock market has an even higher rate of return. The solution looks so simple. Increase the rate of return.
If It Is Too Good To Be True, It Probably Is Too Good To Be True!
Risk. In pooled mortgage funds, if enough mortgages are defaulted on, the rate of return will drop. The stock market drops as well as rises. It is possible, over some period of time that the stock market could actually provide a negative rate of return. A negative rate of return might result in both higher taxes and lower benefits.
Who Is Going To Do The Investing?
--The Social Security Administration
Do they have any investment experience other than the current type of investment. Will Democrats invest in environmental companies, and will Republicans invest in defense industries? Will this change the stock market.
--Individual Social Security Accounts
Will the taxpayers be able to specify where "their" portion of the Social Security account will be invested? This will reward good investors and punish bad investors. Is that good or bad?
Will Equity Investments With Social Security Funds Change The Economy?
Imagine this extreme hypothetical example. On January 1, the Social Security Administration, takes 50% of its funds out of US government debt instruments and invests in the stock market. Someone has to buy those assets that the SSA is selling. People that are invested in the stock market would do that. They would sell their stock to the SSA, and they would buy the assets that the SSA is selling.
Does this create the hoped for boost to the economy because the SSA is investing in the stock market? No, because someone has to buy the debt that the SSA is selling. This was one of Alan Greenspan's concerns.
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