The Potential Impact of Social Security Reform on the VC World –

While Social Security reform isn’t exactly the sexiest topic of discussion among venture capitalists, it might benefit them to pay the issue a little more heed. As Senior Writer Shawn Neidorf tells us (story page 37), if paying Social Security dues becomes mandatory for public employees, it could significantly diminish the amount of capital that public pensions invest in venture funds. And because some 60% – nearly $15 billion – of the money raised last year by venture partnerships came from public pensions, it would be foolhardy not to take notice.

Although revamping Social Security could be years away, the Clinton Administration has placed the issue high on its national agenda, and there are numerous ongoing efforts by lawmakers on Capitol Hill to shore up the ailing system.

To meet the system’s goal of 75 years of solvency, President Clinton has advocated keeping the current system intact but has suggested allowing the federal government to invest some Social Security reserves in stocks and bonds, as well as creating a private investment account mainly for low- to moderate-income workers. Another proposal includes a Republican plan to overhaul the system by allowing workers to invest in stocks and bonds through a personal investment account established within Social Security. And there is a similar plan by an independent commission of congressmen to divert a portion of a worker’s payroll taxes to individual investment accounts.

While the outcome of the debate remains unclear, one thing is for certain – if mandatory Social Security coverage is enforced, VCs will surely feel the financial pinch. State pensions throughout the country are already voicing their concern, and lobbyists have been traveling to Washington in an attempt to stage a preemptive strike.

It is true that most VCs are clueless about Social Security reform because the impact on their business still remains uncertain – and it’s always possible that other institutional investors might move in to fill the gap – but it’s worth keeping an eye on this issue to avoid being blindsided by a move that could have a major impact on the industry.