Although Social Security is one of the most popular and successful entitlement programs in U.S. history, things aren't looking good for its future.
Sadly, the trust fund that is supposed to help pay out benefits to retired and disabled Americans is scheduled to run short in 2035 if no changes are made, necessitating a 21% across-the-board benefits cut.
There are solutions to change that, but most are painful and involve cutting benefits or raising taxes -- or both. But, there's another approach worth considering that could be a whole lot simpler and less politically painful -- although there are some risk to taking it.
It involves changing the way the trust fund is invested.
Could putting the trust fund into the stock market save Social Security?
Social Security's trust fund, which was valued at around $2.9 trillion at the end of 2019 , earned about $77.9 billion in interest income in 2019.
If you're thinking that doesn't sound like much, you're right. For more than a decade, the interest rate on special issue bonds the program invests in have been under 3% -- and in some cases, well under it.
The trust fund is invested in bonds because the law requires it, but there's another relatively safe option that would produce far more income -- investing in equities. The stock market has consistently earned around a 7% average annual return, which is considerably higher than the special issue bonds the fund has put its money into. So, what if a portion of the fund was simply put into the market?
The Center for Retirement Research (CRR) considered just that question, looking at both how the trust fund would've fared had it been invested in the past and how it would likely fare in the future based on an analysis of 10,000 different scenarios accounting for potential variations in bond and equity returns.
What they found is unsurprising: Investing in equities in the past would've left the trust fund in better shape, and investing in the future would also most likely improve its finances. In fact, not only would investing in equities make it possible to avoid tax increases or benefits cuts, but in half of all scenarios considered, it would result in the trust fund remaining financially stable through the entire 75-year period actuaries use to measure its financial health.
While putting some of the fund's money into the market is, of course, a higher-risk proposition than investing in special-issue bonds, historical market performance shows that higher returns from equities often justify that risk.
CRR also found that moving some of the trust fund into equities would better enable intergenerational risk sharing. That's because young people tend to have few invested assets, but have a growing financial interest in Social Security. If part of the trust fund was invested, this would give these younger people more market exposure, shifting some of the financial market risk away from older and more heavily invested Americans.
Will lawmakers invest the trust fund?
Although changing the way the trust fund is invested could be a simple fix that doesn't cause financial pain to any beneficiaries, it's probably an unlikely solution.
It would require bipartisan support for a fundamental change to the program, and cooperation among Washington lawmakers on something so controversial is unlikely to happen anytime soon. Still, with the day of reckoning drawing ever closer for Social Security and with so many other solutions facing serious challenges, perhaps it's an idea that lawmakers should give a closer look.
Of course, even if Congress finds a way to shore up Social Security's finances and stave off benefit cuts, it's vital that you don't over-rely on Social Security in your retirement years.
Getting your full promised benefit still gives you enough to replace only around 40% of pre-retirement income in a best-case scenario. You need more than that to be financially comfortable, which means you must have supplementary savings to support yourself. These savings should be built by investing regularly over your entire career to ensure you have enough of it. If you aren't already putting your money into a retirement account, now is the time to get started.