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Asset Allocation and Risk Allocation: Can Social Security Improve Its Future Solvency Problem by Investing In Private Securities? by Thomas E. MaCurdy Stanford University and NBER and John B. Shoven Charles R. Schwab Professor of Economics, Stanford University and NBER Wallace Hawley Director of the Stanford Institute for Economic Policy Research December 1998 Revised January 2000 This paper was presented at the NBER Conference on Risk Aspects of Investment Based Social Security Reform, John Campbell and Martin Feldstein, organizers, January 15th and 16th, 1999, Cheeca Lodge, Islamorada, Florida. We have benefited from the comments and help of John Campbell, Victor Fuchs, Jim Poterba, Sylvester Schieber, and Steve Zeldes. We would also like to acknowledge the fine research assistance of Stanford Ph.D. students Davide Lombardo and Clemens Sialm. Asset Allocation and Risk Allocation: Can Social Security Improve Its Future Solvency Problem by Investing In Private Securities? by Thomas E. MaCurdy and John B. Shoven I. Introduction Policymakers widely accept that Social Security faces a long-run solvency problem. The Social Security Trustees publish a 75-year forecast of the OASDI system’s finances every year. Since the 1983 amendments the forecast has gotten consistently more ominous. Figure 1 shows the intermediate-assumptions forecast for the Trust Fund balances in 1983, 1985 and 1998. Figure 1: Three Forecasts of the OASDI Trust Fund Balances 25,000 s