Would You Trust the Government to Invest Your Social Security in Stocks?

Social Security faces a funding shortfall, and one proposal suggests the solution could be in the stock market.

The Social Security program is spending more than it earns from taxes, and the main trust fund that helps make up the difference is projected to run out of money by 2032. Once the trust fund runs out of money, benefits would be cut by 7% immediately, and by 23% in subsequent years.1

Apart from increasing the fiscal deficit, solutions to extend the trust fund would require either raising payroll taxes or reducing benefits for retirees. However, both options are generally unpopular across political parties, and lawmakers are wary of implementing them.

Social Security benefits are six years away from insolvency, and many retirees rely on the program to keep them out of poverty. Lawmakers have proposed various solutions to maintain the program's funding, but all options must be implemented soon to make a difference.

To extend the trust fund's lifespan, Senators Bill Cassidy (R-LA) and Tim Kaine (D-VA) have proposed another option: investing the $1 trillion trust fund in stocks.2 Similar methods have been adopted for both foreign and domestic programs, such as the Canadian pension program, the U.S. National Railroad Retirement Investment Trust, and the U.S. Thrift Savings Plan.

The proposal would take the trust fund, which currently totals about $1.5 trillion, and invest it in equities for 75 years.

In the meantime, Social Security would borrow $1.5 trillion from the Treasury to maintain the trust fund. Once that runs out, it would borrow an additional $25.1 trillion to pay for benefits. After 75 years of letting the trust grow through equities, Social Security would pay back the Treasury.

However, even under the rosiest conditions, the volatility in the stock market makes a profit unlikely, according to an analysis of the proposal from the Center for Retirement Research at Boston College.3

Historically, the market's real annual return is about 6.5%, and assuming a 2.3% interest rate, the trust would grow to $30.6 trillion after 75 years. That is enough to repay the Treasury and have $4 trillion left over.

However, there are risks to this strategy. When researchers from Boston College ran simulations using this proposal framework, the investment would not earn enough to pay back the debt 64 out of 100 times.

Additionally, many experts argue that the annual return would be smaller than the historical average. If the stock market returned only 4% annually, in 75 years the $1.5 trillion fund would grow to only $5.2 trillion, more than $20 trillion short of the total borrowed amount.

To add to the gloomy predictions, researchers found that if the government did borrow that much money, it would generally raise interest rates and worsen the stock market's performance. In that case, the trust fund would only pay off 21% of its original debt, even with a 3.5% annual return and the best stock market performance.

"The most likely outcome is that in the 75th year, the government will end up with a big pile of debt, requiring large interest payments," wrote researchers at Boston College. "These far-from-sanguine results, however, do not necessarily mean equities should not be part of a broader Social Security reform package."

If lawmakers were to increase the payroll tax by 3.82% and invest 40% of the trust fund at an annual return of 6.5%, even under the worst outcome, the trust fund would remain solvent indefinitely, Boston College researchers said. Even with 4% returns, the trust would make enough to never increase taxes or cut benefits again in half of the scenarios.