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."