In recent years there have been a variety of proposals that would change the current
Social Security system to include some form of investment of funds in private equities. These
proposals include allowing or requiring individuals to use a portion of the payroll tax to fund
individual investment accounts, either as part of the Social Security system or as an addition
to it. They also include proposals to require the government to invest a portion of the Social
Security Trust Funds in equities. A key element in evaluating these proposals is the rate of return that can be expected on such investments. The members of the 1994-1996 Advisory Council on Social Security
agreed to use a real annual rate of 7 percent (the average for the period 1900-1995) to
compare the three plans put forward by the Council. The Office of the Chief Actuary
(OCACT) of the Social Security Administration has continued to use 7 percent to evaluate
proposals for investment in stocks. However, there is a question as to whether the historical
rate for the last century should be used to make long-term projections over the coming
decades or whether an alternative rate or range of rates is more appropriate.This document includes papers by three distinguished economists that examine this important question, including the issue of how to reflect the higher risk inherent in stock investment relative to investment in U.S. Treasury securities.

published August 2001
Social Security Advisory Board