The clock is ticking on Social Security as we know it. Without major reforms, the program is set to deplete the asset reserves held in its trust fund before the end of 2032. That's less than seven years away.
As of the most recent update, Social Security's Old Age and Survivors Insurance trust held $2.3 trillion. The Disability Insurance trust is one-tenth the size, adding another $230 billion.
But that money isn't just sitting in cash. Social Security invests those assets, generating a return to help fund the program.
Is it possible that Social Security could invest well enough to make up for its growing deficit and save itself from fully depleting the trust fund?
Image source: Getty Images.
What's inside the trust funds?
The Social Security trust funds are permitted to invest only in government-issued securities. It previously bought U.S. Treasury bonds, but it now exclusively buys special-issue securities, avoiding any disruption on the private-capital market. Special-issue securities come in two forms:
- Certificates of indebtedness, which are issued on a daily basis and mature on the next June 30 following the date of issue.
- Special-issue bonds, issued on June 30, with maturities ranging from a year to 15 years.
The interest rate on those issues is equal to the average market yield on marketable Treasury bonds that aren't due or callable for at least four years, rounded to the nearest one-eighth of a percentage point. For example, March issues carried a 4% interest rate, but as bond values declined in March amid the market turmoil, April issues now carry a 4.375% rate.
Unfortunately, the vast majority of the Old Age and Survivors Insurance trust fund is invested in securities with much lower interest rates. Roughly three-quarters of the portfolio was held in issues with interest rates of 2.25% or lower as of the end of February. And many of those bonds won't mature for years, with the earliest maturities among them coming in June of 2027. As a result, the average interest rate on the $2.3 trillion held in the Old Age and Survivors Insurance trust is just 2.52% as of the end of February.
At that rate, the trust is set to generate roughly $58 billion annually on its current holdings. But considering the program is set to further deplete the trust, 2026 investment income will likely come in lower.
In 2024, the trust fund generated $64 billion in net interest income, but the amount has shrunk considerably since 2010, when it generated $108 billion. The combined trust funds generated $69 billion in 2024, down from $118 billion in 2009. For reference, the Old Age and Survivors Insurance program ran a deficit of $103 billion in 2024, which is estimated to increase to more than $300 billion by the end of the decade.
Interest rates dropped in 2007 and 2008 in response to the Great Financial Crisis, and they have remained relatively low ever since. As such, the interest rates Social Security receives have gone down. Combine that with the demographic shift pushing it to pay out more in retirement benefits than it generates in income from taxes, and the interest income it receives is set to continue declining over the coming years. Unless Congress changes how the program is allowed to invest its reserve assets, there's no way it can invest its way out of the hole.
Major changes are coming to Social Security
The Social Security actuaries have assessed multiple proposals to invest a portion of its reserves in equities rather than government-issued bonds. However, the practical impact on the program's impending shortfall is negligible when considering conservative asset allocations required for prudent portfolio management and a relatively slow ramp up in equities.
Considering equities only carry a risk premium of about 5% to 6% above Treasury bonds, even a 100% allocation to equities wouldn't make up the deficit expected for Social Security. Not to mention the increased risk that comes with investing the program's assets in stocks.
If Congress wants to protect Social Security for those who need it most, it will need to enact significant reforms affecting key components of the program, including tax rates and taxable income, full retirement age, and possibly the cost-of-living adjustment. Retirees should expect to see some changes that impact them, and those planning for retirement in the near future should also expect to see even more significant changes.
The longer Congress waits to act, the more severe the changes will have to be. But those hoping Social Security can simply invest its way out of the deficit will be sorely disappointed.
