Proposals to bolster the Social Security trust fund by allowing it to invest in private equities have stirred controversy for more than a decade, but the experience of a retirement plan for railroad workers offers a glimpse at the pitfalls and how they could be avoided, a Center for Retirement Research brief found.
The political and financial risks associated with such investments have long been enough to keep the Social Security fund from getting the nod to invest in equities. The Railroad Retirement program, which is similar to Social Security's pay-as-you-go model, started investing in equities in 2001.
Social Security would need to do two things to follow the path of the Railroad Fund, the center, based at Boston College, said. First, to keep political influence out of the management process, it recommended a "highly circumscribed investment program using index funds." Second, an automatic mechanism to absorb market risks would need to be put in place.
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