Waste of the Day: Antiquated Social Security Investments

Topline: A law from 1935 that dictates how the Social Security trust fund invests its money could be causing the government to miss out on hundreds of billions of dollars of potential revenue each year.

Why does Social Security invest only in Treasury securities?

Key facts: By law, the Social Security trust fund must invest its money only in U.S. securities such as Treasury bonds and Treasury notes. Those investments earned $69.1 billion of interest in 2024, a low 2.5% rate of return.

If the trust fund was allowed to invest in private index funds, the rate of return could be much higher. An investment in the Vanguard Total World Stock and Bond funds would have had a 10.9% rate of return last year, according to analysis in MarketWatch by former Wall Street Journal contributing editor Brett Arends. 

That would have earned $300 billion for the trust fund instead of $69.1 billion — a difference of $231 billion, or about three times the amount Republicans are currently trying to cut from Medicaid, according to Arends.

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Background: There are two main reasons politicians required Social Security to invest only in Treasuries. Treasuries have less risk than stocks, and investing government funds in private companies could “politicize” the stock market, they claim.

Arends argues that modern index funds negate both arguments. Index funds do not allow investors to pick individual stocks, eliminating the possibility of favoritism. And while index funds have more risk than Treasuries, they are still relatively stable. 

Arguments for new investment strategies have come up before

Arends’ argument is not new. In 1999, there were five bills in Congress that would have allowed Social Security to invest some of its money in private stocks, and President Bill Clinton supported the idea. 

At the time, Social Security was projected to run out of cash in 2034. David Marshall and Genevieve Pham-Kanter, two experts at the Federal Reserve Bank of Chicago, found that if the trust fund invested 50% of its money in private stocks, it would not run out of cash until 2058 on average.

The bills did not pass, and the 2034 insolvency date has not changed.

Summary: Social Security is underfunded by an estimated $25.4 trillion in the next 75 years. Any innovative solutions that can lower that number is worth considering, especially those that don’t increase spending or taxes.

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This article was originally published by RealClearInvestigations and made available via RealClearWire.