Public Pension Funding and U.S. Capital Formation: A Medium- Run View and Discussions

Questions about capital formation and the implications of a potentially increasing scarcity of financial capital in the United States have recently emerged as important public issues, not just as a matter of long~range planning but as an object of concern in ~the medium run, too. There are reasons for expecting both the overall scarcity of investment capital and, perhaps more importantly, the relative scarcity of long-term capital to crease during the coming five to ten years. As a result, private businesses may have to postpone or abandon plans for new physical investment undertakings, thereby further reducing the prospects for meeting mediumrun national goals dependent on capital formation. Many individuals and some institutions have therefore called for public policy initiatives to bolster physical capital formation against the pressures of financial capital scarcity. Not surprisingly, proposals for change in the funding of pensions have figured prominently in these discussions. As of the end of 1975, the pension funds of private businesses and state and local governments had financial assets of $255 billion, of which $224 billion represented equity interests in or debt liabilities of U.S. corporate businesses.~ Including the roughly $40 billion of government securities in the Social Security Trust Fund, the total financial assets of pension funds amounted to some 20 percent of the combined equity and outstanding debt of the U.S. nonfinancial corporate business sector. Even with no changes in their current structure, therefore, pension funds already represent a substantial pool of financial capital invested in American industry. Furthermore, this pool is also growing rapidly. In 1975 the pension funds of private businesses and state and local governments purchased, net of sales and retirements, $24