Future Social Security recipients like myself dread the thought that Social Security will run out of money to pay full benefits in the next decade.
The good news is that much can be done to fully fund Social Security well into the future. “Investing some of the Social Security trust fund’s assets in equities (stocks) has obvious appeal,” notes a recent paper by the Center for Retirement Research at Boston College (CRRC).
“Equity investment has higher expected returns relative to safer assets, so Social Security might need less in tax increases or benefit cuts to achieve long-term solvency.”
Sure, stocks can earn higher returns than government bonds most years, but what about market crashes and recessions? Remember 2008-2009, when U.S. stocks at one point tanked about 40%? The CRRC’s authors argue that a prudently managed, diversified portfolio could mitigate risk.
“The real world provides a convincing case that governments can invest in equities in a sensible manner,” the paper notes. “Canada has a large actively managed fund, follows fiduciary standards, and uses conservative return assumptions. In the United States, the Railroad Retirement system has also invested in a broad array of assets without interfering in the private market, as has the Federal Thrift Savings Plan, where the government plays an essentially passive role.”
How would a diversified portfolio be managed? It would be guided by strict standards, much like a modern institutional pension portfolio. Not all of its eggs would be in one basket. Returns could be higher with marginally greater risk.
“The bottom line is that the Canadian investment initiative has paid off, while addressing the concerns of critics. Investments represent a small share of the Canadian economy; they are governed by strict fiduciary standards.”
In any case, most critics of Social Security’s current funding system agree that something needs to be done to bolster the trust fund, which may include politically difficult measures such as cutting benefits or drastically raising payroll taxes on today’s workers. A new funding program needs to be enacted relatively soon.
“But one critical component is currently missing: Social Security no longer has a sizable trust fund to invest,” the study concludes. “And rebuilding the trust fund through additional taxes or borrowing may not be either wise or feasible.”