The Social Security Administration is running out of money.
The agency’s trust fund, which provides for the payment of retirement benefits to tens of millions of Americans, is slowly losing funds, as its obligations in the form of payouts to retirees exceed its cash inflow from taxes on working Americans. At its current rate, the program is slated to become insolvent by 2035, after which Social Security payments will be slashed by roughly twenty percent to keep the program from going into debt.
There would be an obvious political cost to this. Retired Americans are the most reliable voter group in the country, and for obvious reasons, they overwhelmingly support Social Security remaining at its current level. Any politician deemed to be responsible for the program’s cuts, Republican or Democrat, would quickly find themselves out of a job—and this desire for political survival has led to a search for ways to keep Social Security intact for the future.
One such way would be to partially privatize the fund—which, in addition to allowing its survival, would also considerably improve its financial returns to Americans.
The idea’s advocates note that Social Security is required by law to invest only in U.S. Treasury securities, which, while being very safe investments, have a very low rate of return. The program is therefore forbidden from putting its money in more lucrative but still reliable investments, such as stocks, real estate, or commodities.
This requirement is partially a function of Social Security’s creation. The program was established by President Franklin D. Roosevelt in 1935, when memories of the 1929 stock market crash were still fresh. At the time, few in the United States wanted to entrust their retirement fund to Wall Street—and by obliging the fund to invest in treasury bonds, Roosevelt saw an opportunity to use Social Security money to help patch America’s deficits.
Indeed, concerns about massive market crashes are one reasonable counterargument to privatization, particularly when the livelihoods of senior citizens are at stake. However, even very safe, blue-chip investments would provide a much higher yearly rate of return than U.S. treasury bonds would.
A model for such privatization could be Norway’s investment fund, which has invested roughly $1 trillion in private assets, mostly stocks, around the world. Last year, the Norwegian fund gained roughly eleven percent in value, compared to Social Security’s measly 0.99 percent—meaning that in real terms, the Social Security fund actually lost money because its growth rate was smaller than the inflation rate.
Trevor Filseth is a current and foreign affairs writer for the National Interest.