Saving Social Security: a Role for Stock Funds

The great political appeal of presidential commissions, advisory councils and similar blue-ribbon panels is that they can often reach a nonpartisan consensus on highly charged issues and so bolster elected officials for the hard decisions they ultimately must make. By this test the Advisory Council on Social Security would have to be judged a disappointment if not a failure. Instead of offering a consensus, the 13-member body has split three ways in its proposals. On some points all three agree, on others they strikingly diverge. This split both mirrors and foreshadows the deep differences that exist over what should be done to keep Social Security solvent in the coming century.

As 70 million members of the post-1945 generation march toward retirement, Social Security faces the prospect of being unable to fund its obligations. The system can cover its liabilities until 2030; after that, deficits loom. The time to begin debating and planning how to keep the system healthy is now.

For many, the key question has become to what extent Social Security funds should be invested in financial instruments, especially stocks. Proponents of such investments note that stocks historically have returned about 7% after inflation, while the return on the Treasury bonds that Social Security surpluses are now invested in is only 2.3%.

Some on the advisory council urge something close to full privatization, with individuals overseeing their own investments. Others want only a study of partial privatization. All the options would require increasing payroll taxes and raising the retirement age for collecting benefits.

Though hardly risk-free, partial investment of Social Security funds in the market offers the best long-term prospect for greater returns. The soundest idea on the board now, we think, is for a limited range of investment options under government oversight--some conservative, others carrying greater risk--including one or more unmanaged stock or bond index funds that reflect the broad market.

Skeptics raise points that have to be explored, including the effects on the market of billions in new money pouring in and the effect on Social Security if there’s a prolonged market downturn. There’s time to go into these issues. The starting point for the debate ought to be that simply maintaining the status quo is fiscally unsound, while moving to virtually all-out privatization is a clear political nonstarter.