It’s probably too late to help save Social Security by allowing the trust fund to invest in equities, according to a new report.
Most of the proposals to fix the fund’s shortfall have focused on raising taxes and/or reducing benefits. But the idea of investing in equities has persisted through the decades, championed most recently by Sen. Bill Cassidy (R., La). He has proposed creating a new trust fund that would sit alongside the existing one and invest in equities whose returns would, over time, help replenish the original fund’s dwindling reserves.
Yet that type of approach may not work any more, says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of the report. “I’ve been a proponent for decades,” she says. “I just think the window has closed.”
Under law, the Social Security trust fund must invest solely in Treasury securities. The program’s trustees project that, barring Congressional action, the retirement trust fund’s reserves will run dry in 2033, after which benefits would face an automatic cut of 23%. Allowing the trust fund to invest in higher-returning assets would extend its life, proponents say.
The idea isn’t without precedent. The trust of the U.S. Railroad Retirement system, for example, successfully invests in a broad array of securities under external managers and a strict fiduciary mandate, the report notes.
However, the Social Security retirement trust fund is on the wrong trajectory for that type of approach, Munnell argues. Its reserves are rapidly heading to zero from around $2.7 trillion at the end of 2022. Even if Congress were to raise the payroll tax by four percentage points starting in 2030, approximately the amount needed to pay benefits over the next 75 years, it would produce only a small temporary surplus, the report says.
“The bottom line is that the prerequisite for investing in equities—namely, having a meaningful trust fund—is not likely to emerge,” the report concluded.
Munnell says a better time for the program to have begun investing in equities would have been in the aftermath of the 1983 amendments to Social Security, which accelerated payroll tax increases and made some benefits subject to federal income taxes, among other changes that collectively caused the trust fund’s reserves to grow dramatically.
Cassidy’s proposal doesn’t specify how the new trust fund to invest in equities would be created. That would be open to negotiation, with possibilities including borrowing the amount, raising taxes or cutting spending to fund it, according to a spokeswoman, who says of the senator: “He likes to say the best time to plant an oak tree is 50 years ago, the next best time to do so is now.”
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