No doubt you know the statistics: the Social Security program’s reserves are due to run out in 2034. At that point, the only money available to be paid out will be money collected that month from those current workers who are paying into the system. Current estimates say that this will amount to about 75% of scheduled benefits.
There are, of course, a number of solutions. Congress could gradually raise the ages at which future retirees could qualify for Social Security benefits. They could (yet again) increase the ceiling on income on which Social Security payments are collected. Or they could raise the various Social Security and Medicare tax rates on the income below that ceiling.
Each of these solutions is likely to be painful—and politically difficult. But there might be a better solution.
A research team composed of Gary Burtless of Brookings Institute, Anqu Chen, Wenliang Hou, Alicia Munnell and Anthony Webb of Boston College—tried a different approach to bolstering the Social Security system. Suppose, they said, that 40% of the current surplus fund could be transferred from their current investment positions—in U.S. Treasury bonds, earning practically nothing—to stocks. At the same time, suppose you added 2.62 percentage points to the Social Security payroll tax, in order to smooth out the results. They then looked at different possible outcomes using historical market data.
At the median return, the trust fund would stay solvent over the next 75 years—a great improvement from our current trajectory. But they also found that 11% of their simulations resulted in trust fund exhaustion—something that will happen inevitably on our present course, but at a lower tax rate.
What about the argument that the massive cash flows into stocks would result in the Social Security trust fund basically owning the market? The researchers modeled what would have happened if 40% of Social Security dollars had been invested in equities in 1984, and found that it would only control about 10% of today’s market.
What are the chances that we’ll see index funds in the Social Security trust fund? If it’s a less painful alternative politically, and Washington recognizes the urgency of fixing Social Security, you might hear a proposal sometime during the next presidency.
About the Author: Bob Veres has been a commentator, author and consultant in the financial services industry for more than 20 years. Over his 20-year career in the financial services world, Mr. Veres has worked as editor of Financial Planning magazine; as a contributing editor to the Journal of Financial Planning; as a columnist and editor-at-large of Dow Jones Investment Advisor magazine; and as editor of Morningstar’s advisor web site: MorningstarAdvisor.com.
Mr. Veres has been named one of the most influential people in the financial planning profession by Investment Advisor magazine and Financial Planning magazine, was granted the NAPFA Special Achievement Award by the National Association of Personal Financial Advisors, and most recently the Heart of Financial Planning Distinguished Service Award from the Denver-based Financial Planning Association.