Retirement Blog

Finance Blogs » Retirement » Putting stock in Social Security

Putting stock in Social Security

By Jennie L. Phipps · Bankrate.com
Monday, November 25, 2013
Posted: 3 pm ET

One way to shore up the Social Security trust fund is to invest it in something with a better return than U.S. Treasury bonds.

The idea has been floated off and on for years and is always rejected. But, when Steven Sass, research economist for the Center for Retirement Research at Boston College, recently took a hard look at the issue, he found a good reason to reconsider. The U.S. government's Railroad Retirement program has invested in equities since 2001. Taking this step has shored up the program despite market downturns in 2001 and 2008.

The program is designed so that when stocks are producing high returns, the railroad employers and employees pay less into this retirement planning system. When the market flounders, the downturn triggers a decline in the ratio of the railroad trust fund assets to annual benefit payments, averaged over 10 years. Fund assets must stay within a target band of four to six times outlays. If they aren't, then employer and employee payments automatically increase.

Since the program was instituted about a dozen years ago, contributions were lowered from the historic employer plus employee payroll tax level of 18 percent to 17 percent and then to 16 percent for six years from 2007 to 2012. In 2013, the delayed reaction to the 2008 downturn pushed the payroll tax level back to 17 percent. The program remains financially stable with contributions still lower than they were before the investment program was initiated.

Sass sees a similar approach as a good way to fix Social Security. "If Congress could come to an agreement about who bears the downside and what we do with the upside, we should do better in the long run than just investing in government bonds," he says.

Sass says he believes that any plan would need to call for professional management that keeps political influence at bay and focuses on something like index funds that are primarily passive investments. He also said he thinks the adoption of investing in equities must be accompanied by further reform in the way that Social Security responds to risk.

"Our system is off the rails very badly, but everybody just yawns," he says. "If we had a mechanism that automatically cut benefits and raised taxes to bring the system back into balance over a 20- to 30-year period, we wouldn't be nearly as off track as we are today."
 

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
12 Comments
John
November 28, 2013 at 12:49 am

Why is the solution always to take something away from the successful? The person getting 200K a year in retirement must have made smart choices during his/her lifetime. Let's penalize him so we can continue to give money to those who foolishly spent theirs or were never bright enough to make money anyway.
I am sick and tired of this mentality of give-me, give-me, give-me. We all have to take a cut in our SS expectations or the fund has to take more risk. Just a fact of life that we are all living longer.

Roger
November 27, 2013 at 11:31 am

As mentioned earlier, raise the cap on taxable earnings. As well, gradually raise the age to collect and incorporate needs testing (if someone is getting 200K from their retirement accts and pensions what do they need with the miniscule amount they're getting from SS?

Add a comment

(Comments may take 5-10 minutes to appear)