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Investment of Surplus Social Security Trust Funds in State and Local Government Securities

Public attention has focused recently on the surpluses in the Social Security trust funds. Proposals have been advanced to change investment policies of the funds so they function more nearly like true trust funds, namely by diversifying their investment portfolio. Since the beginning of the Social Security program, the law has restricted the investment of its excess receipts to interest-bearing obligations of the United States Government. Currently, these investments are nearly all special, nonmarketable U.S. Treasury obligations.

The Government Finance Officers Association (GFOA) believes that the safety of the Social Security trust funds and their availability for payments to beneficiaries is of primary importance.

At the same time, GFOA looks with favor on proposals that could broaden the market for state and local government securities. A broad and diversified market increases investor demand and improves the overall structure of the market so that it functions more effectively and efficiently in providing a steady and reliable flow of capital from investors to state and local government borrowers. Expanded investment interest in state and local government securities also provides a buffer against fluctuating investment demand and protects borrowers and investors from volatility in the marketplace. That market, however, like other markets, is affected by shifts in national monetary policy, changes in federal fiscal policies and financial shortfalls caused by deteriorating economic conditions. For example, recent federal tax code changes in the alternative minimum tax and the bank interest deduction, coupled with a decline in bank profitability, have reduced dramatically commercial bank demand for state and local government securities. In 1979, commercial banks held 42.2 percent of outstanding state and local government bonds. At the end of 1989, the Federal Reserve reported that percentage dropped to 16.8.

If the Congress considers proposals to permit investment of surplus Social Security trust funds in state and local government securities, the Government Finance Officers Association could support such proposals if two concerns form the basis of discussions surrounding the enabling legislation. The first is a commitment that the sole purpose of the diversified investment authority is to protect the Social Security trust funds and maintain the funds' earnings in accordance with prudent trust funds management and sound investment practices. This is consistent with GFOA policy regarding state and local government retirement plan investment earnings. That policy maintains that the primary responsibility of a pension plan and its fiduciaries is to provide promised benefits to its members. To meet this responsibility, part of the funds used to pay these benefits could be derived from earnings obtained through the prudent diversification of investments. Funds should be invested at a reasonable level of risk and rate of return.

The second concern is that the diversified investment policies and practices must not change or interfere with the operation of the private market for state and local government securities. There should be no domination or disruption of the market for state and local government securities by the trust funds, for any reason, and state and local governments should be protected against any loss of autonomy in the structuring and marketing of their debt or any increase in borrowing costs or the imposition of other restrictions on the market as a result of the investment of Social Security trust funds in state and local government securities.

Adopted: June 4, 1991