To argue that avoiding any public investment in private assets is more important than raising national saving, one must believe that the negative impact on the efficiency of our capital markets from such public investments would amount to inefficiencies of hundreds of billions of dollars or more per year. The evidence on public pension investments in private assets Public investments in private assets carry risks. The benefits of increased national saving, however, may well outweigh the costs of limited public investments in private assets, especially if those investments were undertaken through the Social Security system rather than a generic budget account, and through an independent board, with private investment managers and substantial protection against political interference. Given the experience of state and local pension funds in the United States, and national trust funds in other developed countries, including Denmark and Norway, it seems unlikely that limited Social Security investments in private assets for example, amounting to no more than 10 percent of GDP or so would generate efficiency losses of hundreds of billions of dollars a year. In the United States, state and local public pension funds have long invested in private assets.
Recent research suggests that state and local pension funds now perform relatively well.
Today, public plans appear to be performing as well as private plans. The experiences of foreign governments in managing private investment is also encouraging. For example, Canada has recently changed the regulations governing its Canada Pension Plan to allow that system to invest a portion of its reserves in private assets. The investments are governed by an independent investment board comprising 12 members, each of whom will serve a three-year term. It is still too early to know how well the Canadian approach will work.