Inspiration:

The path to the current Social Security Administration in the United States was a long time in the making.  Since the initial inspirational creation of this great nation, and even before, the aspiration of equality and opportunity for all citizens has been a core tenant.

During the Revolutionary War, prolific theologian and writer of his time, Thomas Paine, the author of “Common Sense”, was one of the first Americans to formalize the notion of a public retirement system, in a little read work called “Agrarian Justice”.

In fact, governmental aid to the impoverished segment of society in North America dates all the way back to the Pilgrims, who borrowed the philosophy from their 17th century English Law roots.

To that laudable end, formalized “poorhouses” sprung up across the country over the next few centuries.  While commendable in concept, these facilities were plagued by deplorable conditions, and failed to provide the support required for less-fortunate folks to get back on their feet.  Also, each city handled their deprived differently, some locales generously and others meagerly, highlighting the need for a standardized system nationwide.

The true precursor to Social Security were the federal government subsidies disabled Civil War veterans, or their widowed wives and orphaned children, were eligible to claim.  These payments initiated in 1865, after the culmination of the conflict, expanded during 1890 to cover a broader scope of disabilities, then again in 1906 by instituting an age provision.  Hundreds of thousands of Americans were furthered from this financial support over the life of the program.

Private pensions also came into vogue around this time, pioneered at the Alfred Dodge Company, the recognizable automobile manufacturer, in 1882.  The size and scope of these corporate benefits expanded sustainably over the next century, lauded by key employers in the domestic economy like GE, GM, IBM, and P&G.  American businesses have a thing for acronyms.

While these retirement packages were valuable for recruiting and retaining workers, many such plans have become fiscally insolvent of late, plagued by the same factors that are now hindering Social Security.

During the end of the 19th century, the Industrial Revolution fueled substantial societal advancement, with folks moving from the country to the city, improving their quality of life, and thus measurably increasing age expectancy.

While seemingly advantageous, over time these older individuals would demand and require expanded support, in terms of both healthcare treatments and monetary resources.  Also, the mass migration to factory complexes in developing urban hubs put an end to extended families living together on farms, an arrangement that had provided a valuable buffer during past times of economic hardship.

This business boom went well for a while, culminating in the Roaring 20’s, then a disastrous economic meltdown ensued.  In the final 3 months of 1929, the stock market crashed by over 1/3rd, leading to a multi-year depression where 10k banks failed, nationwide economic output as measured by gross national product was nearly cut in half, and unemployment peaked at an unfathomable 25% level.

If there was ever a time to provide the country with a social safety net, this was it.

Ideation:

Some states tried to enact their own elderly assistance programs coming out of the Great Depression, but most of these schemes were poorly run and underfunded.  It was clear a cohesive national initiative was needed, and voters made this a priority topic in the 1932 election cycle.

In a time of tumult and change across the United States, Franklin Delano Roosevelt won the 1932 presidential vote in a landslide victory over incumbent Herber Hoover.  FDR immediately went to work addressing the myriad issues impacting the citizenry at large.

As the economy continued to deteriorate, in June of 1934 President Roosevelt announced his plan for a comprehensive Social Security package to support those in need.  Not happy about the idea of another grant program, where the federal coffers would need to subsidize undisciplined states’ budgets, he mandated the same system be applied nationwide.

FDR’s ideas were very contentious in political circles.  The most notable complaint was that enacting such a scheme would lead the United States government down a path of socialism, which was a worrisome proposition given the geopolitical backdrop of the era.

Another heated debate centered around how to collect and manage the funds, either with individual ledger accounts for each person, or via a large shared pool of funds.  The later approach won out, as it was easier to manage from a banking standpoint, and wouldn’t disadvantage workers already late in their career.  This singular, seemingly innocuous, decisions can be traced back as the seed of Social Security’s current thorny challenges.

The concept of using incoming taxes from employed individuals to satisfy the expense needs of retirees was also borrowed from America’s friends across the pond in Europe, where most nations had much more robust and generous societal support systems.

While all the collected tax incomes were to be comingled, the compromise was to base payouts on each individual’s actual income history, motivating people to earn more annually and work longer.   This hybrid approach, as with any good piece of governmental policy, was just confusing enough that the average employee was unsure if they were funding their own retirement, or that of the aging generation ahead of them.

Despite contentious debate on Capital Hill, less than a year after being proposed by the POTUS, this idea became an official legislative reality, which lives on, albeit oft-modified, to this day.

Inception:

The Social Security Act was signed into law by President Franklin Delano Roosevelt on August 14th, 1935.  This bill was passed by Congress as part of the New Deal, a sweeping list of economic and social reforms meant to bring the citizenry out of the hardships still lingering from the Great Depression.

The regulatory framework was facilitated by the Committee on Economic Security, led by Secretary of Labor Frances Perkins, the first woman to serve in a presidential cabinet.  While novel from a federal intervention standpoint, especially with regards to directly supporting the senior segment, much of the program’s structure was taken from a paper written by a trio of Political Science professors at U.W. Madison a year earlier.

The overarching intent of the Social Security Act was to address a pair of separate and divergent societal needs: in the near-term help the elderly cohort afflicted by the depression, while simultaneously creating a long-term pension system that younger workers could contribute into over their career.  Thus, two distinct programs were created by the legislation.

OAA, standing for Old-Age Assistance, was meant to address the immediate needs of old people through means testing, and would be funded out of general federal coffers.

Meanwhile, Social Security, dubbed SS in typical governmental abbreviation fashion, would set up a future retirement system for all employees, by collecting an additional income tax which would be saved and invested by the administration to accommodate future payouts.

While the bill included clauses to help unemployed, widows with children, and disabled folks, the primary goal was to provide retired individuals over the age of 65 with a monthly pension distribution funded by payroll tax payments made over the workers’ lifetime.  A simple and elegant cash-flowing approach, what could possibly go wrong?

This legislation also established the Social Security Board, which later became the current Social Security Administration, who was tasked with collection and distribution on these funds.  This has proven to be a daunting and complex task as the level of assets have ebbed and flowed over time.

Initiation:

Individuals who wanted to be eligible for Social Security benefits needed to apply for and receive a physical paper card.  Those were certainly simpler times, with no email communication or electronic footprint.   However, this 9-digit identification number is now ubiquitously used for Americans’ personal verification in the evolved digital world.

President Roosevelt ambitiously sought for the new payroll tax collection to be initialed on January 1st, 1937.  Getting a brand-new ID system implemented for every interested participant nationwide proved to be quite a feat.

Using local post offices for card distribution, starting at the beginning of November 1936, the first week saw one 1 million citizens register.  Over the next 4 months, over 25 million individuals were onboarded, an impressive tally which represented nearly half the working age population of the country.

Payout benefits were originally slated to occur at the beginning of 1942, allowing a 5-year runway to build up the fund’s assets.  However, this date was moved up two years to the start of 1940, as the economy was struggling mightily.

In fact, much of the populous, and even some economists, blamed the U.S. recession in 1937 on the substantial Social Security payroll taxes taken in that initial year.  It was clear even back then this administrative agenda would have substantial effects on the American economy moving forward.

The first monthly distribution from the program went to Ida May Fuller, a resident of Ludlow, VT.  Despite having only paid $24.75 into the fund over the past 3 years while working as a secretary, per the benefits table, her initial check was $22.54.  This was clearly not a segregated accounts system.

Ms. Fuller lived to the ripe old age of 100 years, collecting nearly $23k over the 35 years she was retired.  This ironic result foreshadows the issues that would play out with the Social Security trust fund, by guaranteeing retirees way more money than they ever paid into the system.

Many industries, like agricultural laborers, domestic help, government personnel, teaching professionals, social workers, non-profits, and self-employed were initial excluded from the program.  There was a decided discrimination bias against African Americans and women in this passed legislation, though scholars debate if these oversights were intentional, or simply a product of the times.

A trio of cases brought before the Supreme Court in 1937 cemented the New Deal mandates, specifically the levying of extra payroll taxes, and inequitable distribution of funds to retirees, core tenants of the Social Security program, officially into law.

Improvement:

Many changes have been made to the Social Security system over time, each requiring official legislative action.

The term FICA stems from a 1939 amendment to create the Federal Insurance Contribution Act within the Internal Revenue service tax code; this acronym remains on paper and electronic paychecks to this day.

During the 1950’s, job title eligibility requirements expanded to encompass a much broader swatch to the working class, to the primary benefit of women and minorities.  Also, the option for retirement at 62 years of age was created, with a 25% reduction in benefits.  Over this time period, to account for the expanded demand, employer and employee tax rates were increased from the menial original 2% value, first to 4%, then 6% each, in 1954 and 1960 respectively.

In the consequential Social Security Act of 1965, Medicare was enacted as guaranteed medical insurance for all SS recipients starting at the same age 65, as part of L.B.J.’s Great Society reform program.  The fiscal challenges and economic manipulations caused by this health care legislation require an entirely separate exploration.

Richard Nixon instituted an automatic annual cost of living adjustment to Social Security payments based on the calculated Consumer Price Index, or CPI, inflation in 1972; prior such increases in outlay required Congressional approval.

A Supplemental Security Income program was established in 1974 to help low income, low resource, individuals who are disabled, blind, or over 65 years of age.  This ancillary operation is funded by general federal tax revenue, but managed and dispersed by the Social Security Administration.

The potentially insolvency of Social Security was first grasped by the government in 1977, causing officials to make minor adjustments to taxes rates and benefit payouts for anyone born after 1917.  While President Carter touted that these improvements would make the program stable and solvent through 2030, the changes did little to sure up the operation, but did bring the political unpopularity of reducing government handouts to citizens sharply into focus.

The core issue was that during the stagflationary period of the late 1970’s, inflation was rising faster than wages increased, thus income tax revenues were lower than mandated COLA outlays, not to mention the high unemployment, with more retirees claiming early out of economic need.

Back on the verge of collapse in 1983, President Ronald Reagan stepped in and increased the full retirement age to 67, while also applying income tax to a portion of FICA payments.  While counterintuitive, and clearly double dipping on personal wage levies, coffer solvency was improved, at least in the short term.

Nothing of note has been done since, with Presidents George W. Bush and Barack Obama both making small, relatively meaningless, modifications to qualification requirement and benefit payments during their tenure.

After the 1980’s, no legislative action on Social Security has been taken during even years, for fear of experiencing blowback in the subsequent election cycle.  The entire system has clearly got too big and bloated for politicians to safely or willingly address.

Institution:

Like all government programs, Social Security was initially projected to be budget neutral and self-financing indefinitely, through employer and employee payroll taxes, combined with interested earned on the Treasury bonds purchased with these monies.

Over the years, the official ledger has drifted back and forth between on and off balance sheet; while seemingly semantics, this accounting identity can play a major role with how the administration takes in, and distributes out, their resources.

From initiation up until 1968 legislation pushed through by President Johnson, Social Security funds were off-budget, which meant all accounting transactions remained separate from the unified federal register.  The next 15 years, a period of strong fiscal austerity, brought this substantial asset at the time, along with many other secondary accounting items, back on the books, as a means of shoring up the shaky fiscal house in Washington.  Politician are always politicking.

Predicably, due to balanced budget complications, Social Security transitioned back into the hidden domain by 1990, aside from national deficit calculation, a rising tally which no American politician or citizen, along with most investors worldwide, seem to care about.

Currently, the Social Security trust is not actually a separate and isolated entity, but part of the broader federal budget coffers.  This money is spent as quickly on it comes in, with IOU’s being digitally recorded.  While potentially reasonable when treating the government as a wholistic business entity, this approach doesn’t help with the spendthrift politicians in DC these days.

Regardless of balance sheet semantics, Social Security currently represents the largest line item, at nearly a quarter of annual spending.  More importantly, this expense, along with Medicare, Defense, and Interest, account for 2/3rds of the official CBO total federal budget, as shown in the following pie chart. [REF]  This ratio is rising, and considered mandatory, so there’s little hope to stem this swelling tide.

In nerdy economic circles these days, there’s substantial debate on whether to use incoming tax revenue to pay down existing government debt, or purchase more Treasury bonds, which would facilitate expansion of national deficit.  Thus far, the latter strategy of kicking the can down the road is clearly winning out.

Information:

The Social Security Administration issues an annual trustee’s report.  Currently, there are actually two separate and discrete accounts: Old Age and Survivor’s Insurance, or OASI, and Disability Insurance, dubbed DI.  These are typically collectively referred to as the Social Security trust.

In 2024, 183 million employees, 93% off the American workforce, paid some amount into Social Security.  A majority of the jobs waived from mandatory contribution are in the government realm, spanning the federal, state, and local levels, where employees fund a separate pension system.

These payroll taxes are capped at a specific income level adjusted for inflation annually, this value for 2025 is $176k.  Due to this limit, there’s a theoretical maximum benefit retirement if a worker is lucky enough to earn this maximum income for at least 35 years of their career.

The current Social Security tax rate is 12.4%, split evenly across employees and employers.  85% of the levies fund OASI, and the remaining 15% allotted to DI.  There is an additional 2.9% portion of FICA collected from both parties associated with Medicare, along with an extra 0.9% for high income earners over $200k, as part of President Obama Affordable Care Act legislation in 2010.  While a single line item on paychecks, these funds are not deposited into the Social Security trust.

From an outflow standpoint, 55 million people receive explicit retirement benefits, with 75 million in total getting paid through a Social Security administered program.  This tally includes 7 million people receiving Supplemental Security Income payments, with 1/3rd of them also getting traditional OASI distributions, as double dipping in allowed for this very poor cohort.

Social Security is one of the broadest impacting endeavors the Federal government runs.  87% of people over 65, and 93% of seniors over 75, receive monthly distributions.  The vast majority of individuals not eligible for benefits already have a public pension through government employment during their work career.

Currently, the average retiree receives almost exactly $2,000, with the average disabled worker getting $1,580 monthly.  These generous values add up: in the 2023 calendar year Social Security dispersed $1.38 trillion, representing nearly a quarter of the entire federal budget.

Roughly half of Social Security recipients pay taxes on a portion of their benefits, based on their income bracket.  This supplemental revenue is fairly small, at just 4% of total annual collections, but does flow back into the broader pool.

Per a Pew Research survey conducted last year, 79% of adults are opposed to any changes to the system that would reduce benefits in the future, with this sentiment shared across nearly every different voting cohort including age, gender, income, party, and race, as broken out in the diagram below. [REF]

In fact, 40% of folks surveyed advocated expanded coverage and benefits, despite the current challenges with program financing. No wonder politicians are extremely hesitant to modifying Social Security.  There’s not much Americans like more that money showing up in their mailbox each month.

Implementation:

Now to address the question everyone wants to know.  How are monthly Social Security payout benefits in retirement actually calculated?  Time for a mathematical deep dive, with lots of abbreviations.

Credits are awarded when an employee pays a certain amount into Social Security each year.  4 credits can be earned annually, with the current minimum required income level being $7,240; this amount doesn’t need to be spread out evenly over 4 quarters.  40 credits, essentially equivalent to 10 years of full employment, which don’t have to be consecutive, are required to initially qualify for Social Security.

Retirement benefits are calculated based on the highest 35 years in one’s working career, starting at age 21.  The annual salary is converted to average indexed monthly earnings, or AIME.  In addition to dividing by 12, the income value is indexed for inflation, again using the government’s preferred CPI.  Zeros are added into the calculation if the 35-year tenure length isn’t reached before claiming.

To further complicate things, the AIME is then broken into 3 separate segments, referred to as “bend points” in industry jargon.  Individuals receive 90% of the AIME up to the first value, 32% of earnings up to the second value, then just 15% beyond that amount.  For simplicity, final payout values are rounded to the nearest dime.

For 2025, the bend point numbers are $1,226 and $7,391; these are adjusted annually by the administration.  This system allows a higher percentage of income to be paid out for low wage workers.

The resulting sum is the primary insurance amount, or PIA, represents the total benefit value an individual is entitled to at full retirement age, currently 67 for any person born after 1960.  This amount is the basis upon which calculations are made to adjust for those who elect to claim earlier or later than FRA.  Confused yet?

Currently, the earliest age Social Security benefits can be taken is 62, with the full retirement age being 67, and mandatory distributions starting at 70.  For each year an individual defers, they get an 8% increase in annual benefits for the remainder of life, representing a high guaranteed return that makes waiting as long as possible a valuable strategy.

Obviously, deferring Social Security implies a person has other sources of income during retirement that can be tapped into.  Which isn’t the case for many aging folks across the country.  Compiled survey results from a trio of sources suggest that nearly 1 in 4 retirees rely solely on Social Security payouts to fund their lifestyle.  Furthermore, these incoming checks represent at least half of monthly proceeds for over 50% of recipients, as highlighted in the following bar graph. [REF]

Clearly, Social Security has become entrenched as the primary and critical means of retirement income for a majority of Americans.  Which is why changes to the system are so difficult, not just logistically, but also emotionally.

Insolvent:

The most recent 2024 SSA trustees report also comments on the solvency of the program.  They anticipate that all the amassed OASI reserves will be depleted by 2033, at which point only 79% of outlays can be covered, by estimated incoming tax receipts.  The DI trust is on more stable fiscal footing, with projections showing 100% payouts and sustainable solvency through at least 2098.

The Social Security system, like most federal government schemes, is intentionally confusing and convoluted.  But the format and execution of the program is very straightforward.  Funds in the trust are invested in U.S. Treasury securities, one of the most sought after and stable investments in the world.

At the beginning of 1990, the Social Security portfolio had a blended interest rate over 9%, and an average weighted maturity of 6 and a half years.  By the start of 2025, the composite interest has fallen to just 2 and a half percent, and the maturity shortened to only 5 years.

This trend generally mimics the continual drop in interest rates over this time, but the portfolio has failed to capture the strong stock market returns of the era, even with a pair of substantial bear markets in the data set.

Over this 35-year period, the total trust value grew substantially, from $170 billion to $2.7 trillion, but the growth has been fueled much more by incoming tax payments than accrued portfolio returns.  However, inflows have slowed over the past decade, with outflows ramping up, mimicking the work patterns of the large Baby Boomer demographic, who are now are retiring in increasing numbers, transitioning from an asset to a liability in the Social Security framework.

Peaking just shy of $3 trillion in June of 2020, over the past year, for the first time in the history of the OASDI trust, the balance has started trending down measurably for more than just an isolated month or two.  The May 2025 balance of $2.667 trillion represents a level not seen since November of 2011.

The trend of cash flows has shifted, and not to the positive side of the ledger.  Even the most ambitious projections see the asset values depleting, with more dire assumptions pointing to depletion in less than a decade, as show in the next graph. [REF]  The middle model closely aligns with the Social Security Administration’s acknowledged surplus depletion by 2033 at the current run rate.

Up until this point, the incoming tax revenue was sufficient to cover the outgoing payments, often with substantial surpluses being added to the coffers.  Now the train has left the station heading downhill, and will be difficult to stop before it veers off the tracks and crashes at high speed.

Impending:

The relentless low interest rate environment, the burgeoning cohort of retirees, and increases in longevity of Americans from the 1930’s start point have all conspired to stress the archaic Social Security system.

This “pay as you go” operation ebbs and flows between inflows and outflows, based primarily on demographics of workers as compared to retirees.  When the Baby Boomers were in their prime working years, the excess stash swooned to nearly $3 trillion.  With many more employed than pensioned, the accounting was working perfectly.  For the short term.

The bipartisan refinancing legislation, passed in 1983, which gradually increased the duty rate for both employees and employers, allowed a surplus to be generated every year until 2021.  This promising outcome was a result of the tax hike, combined by favorable demographics and a burgeoning economy.

Now, 76 million Baby Boomers, the aptly dubbed large cohort born between 1946 and 1964, are in the process of entering their Social Security claiming years.  For the next decade, the number of new aged retirees will outpace the young folks entering the workplace, in both quantity and salary, as the shifting bulge in the U.S. Census Bureau’s age distribution diagram to follow demonstrates. [REF]  Which puts extra pressure on an already stressed system.

In 1965, there were 4 employees for every pensioner in America.  Today, that ratio has dipped to 2.7, with projections for continued drop in the future.  The math of demographics is hard to argue with, or overcome.

Projected full depletion of the trust fund is currently slated for 2033, which offers up some time for tweaks to the system.  However, entitlements for the aging Boomers, a large voting block, is a political 3rd rail, that nobody in the government is excited or motivated to address.  When the surplus monies are depleted, models shown just 4/5ths of previously guaranteed payments can continue to be made based on revolving revenue inflows.

Lack of confidence in the existing program can lead to a “run on the bank”, with retirees claiming their benefits early, based on concerns payments will be reduced in the future if they wait.  As such, public perception of the Social Security system must be kept high, even if the entire scheme is toppling down behind the masking curtain.

Invisible:

More skeptical researchers argue the mistaken focus on when the Social Security trust will run completely out of funds misses the broader issue.  This ledger is simply paper promises, which don’t link to any actual currency specifically reserved for this program.  If tax revenue slows down, or arbitrary administrative spending continues to ramp up, the solvency projections for OASDI become quite dire.

The Social Security balance is purely an accounting trick.  Taxes taken in by employers are transferred to the federal government on a monthly basis as a lump sum, encompassing both the Social Security and Medicare contributions, from both the employee and employer.

These monies are used to pay out scheduled benefits to retirees, with the remainder going into the general U.S. Treasury coffers, where it’s often quickly spent on other governmental outlays.  As a result, there are no actual isolated funds in the trust, just a number in a spreadsheet.  This banking activity is merely digital accounting transactions, with no actual cash exchanged.

The investment in special-issue Treasury bonds is again a façade.  There isn’t a nearly 3-trillion-dollar lump sum held anywhere.  In fact, tax revenue is often repurposed for other priority expenses of the administration as soon as the deposits hit the back account.  This is akin to taking out a payday loan in advance of one’s employment check; a practice societally shunned on the individual level, but apparently completely acceptable for the highest layers of national leadership.

The soundness of Social Security relies completely on the solvency and sustainability of the U.S. government.  The collected revenue is debatably “invested”, in a non-traded bond offering with no diversification or outside liquidity.  Essentially, bean counters in Washington, DC are deftly moving the same dollar back and forth between left and right pockets in the same pair of pleated khaki pants.

Private and public pensions, servicing big businesses, elite universities, state teachers, and unionized trades, are very different in terms of execution.  Such entities are required by law to hold their amassed funds in a discrete account, invested across a broad swath of asset types.  Such legal obligation standards apparently don’t apply to the federal administration.

These concerns regarding repurposed Social Security coffers have been frequently raised over the past few decades, but no real fiscal issues have materialized yet.  This could potentially be a case of the boy who cried wolf being ignored time after time, until the entire system falls apart.  The real question is, who’s going to eat who?

Investment:

The OASDI trust investment account holds only U.S. government securities, both short-term certificates of indebtedness and long-term bonds.  The former are essentially money market instruments, with the later available in durations from 1 to 15 years.  Practically, the yields on the bond portion end up being comparable to the 7-year Treasury notes.

The administrators have tended to skew the ratio heavily towards bonds over bills throughout the history of the program, with long-dated paper representing over 90% or more of the portfolio.  Given the typically higher yields of these offerings, and the intended perpetual nature of Social Security, this investment decision likely makes sense.

Nearly all these securities are purchased via special issue transactions, with very little bought at open public auction.  Conveniently, this allows the federal government, specifically the Treasury Department, per the bidding of Congress, to use the money for other non-Social Security expenditures.

Also, unlike standard U.S. government bonds with fixed 10 or 30-year terms, these special securities are redeemable at any time to satisfy the cash flow needs of the trust.  Essentially these outlays are paper “I-Owe-You” instruments, rather than a discreetly separate, lock-box, allocation, as the program originally stated.

The Social Security fund is a primary buyer of U.S Treasuries, amassing nearly $3 trillion in notional value by the end of 2021.  This large portfolio earned an average interest rate of 2.3%, highlighting the opportunity to enjoy the potential benefits of diversification into stocks, and potentially even alternative assets.

Intriguing:

The recent depletion of Social Security’s coffers has resulted in a clamor for a different investment strategy, most notably investing some of the capital in the U.S. stock market.  After a strong 15-year run, it makes sense this approach is now being touted, but this isn’t the first time such a concept has been discussed.

The idea of having Social Security buy equities was originally floated by President Clinton and his cabinet during the late 1990’s.  At the time, this idea was highly controversial, and opposed by many in the administration, most notably Federal Reserve chairman Alan Greenspan, who was adamant the government shouldn’t meddle in the corporate market.

The idea of investing on stocks becomes popular any time there’s a sustained bull market, with returns robust and seemingly reliable in perpetuity.  Many parallels can be drawn between the late 1990’s tech bubble, and the meme stock plus SPAC craze of 2021.  However, history shows that long and steep drawdowns are an ever-present element of equity exposure.

The fact that bond yields, and interest rates, have trended down over the past 4 decades is another reason why many are now clamoring for a new investment model.  Unlike savvy hedge fund investors, the U.S. Treasury has not been able to take advantage of the capital gains generated by long-term bonds over this period, as they’re forced to hold their debt portfolio to maturity.

While a federal agency investing its retirement assets in this same administration’s debt seems absurd when applied to an individual company’s pension plan, the United States government is a global powerhouse, which isn’t going broke any time soon, despite all the doomsday prognosticators.

Plus, as the global reserve currency, if anything does go wrong, the Treasury can simply fire up the printing presses to meet obligations, at least in the short term.  Congress has much less control over the machinations of the broader stock market.

If the Social Security balance was invested 100% in U.S. stocks, this would represent over 5% of the total market capitalization, which could obviously lead to price distortions.  Also, there’s a clear conflict of interest with the federal government investing in private companies, and being tied to the success of these ventures, which could influence legislative action.

Plus, the OASDI funds aren’t actually in an account, so the Treasury department would need to create the currency; such monetary expansion hasn’t been an issue in recent years, but is worth noting from a fiscal solvency standpoint.

The high valuations of the stock market currently, especially in the United States, make this a risky time for Social Security to start pouring money into the market.  Also, there’s already a relentless passive bid for equities, which could become exacerbated if a large government program joins the fray.

Shoving more investment capital blindly into domestic stocks could exacerbate the already burgeoning asset bubble.  A fair critique, but one that’s been made since the turn of the millennium.  However, it’s important to note that nearly a quarter century later, the purchasing demand in the market remains alive and well, possibly even larger than in any prior era.

ETFs have taken over the preferred trading tool, starting in 2008 after the Great Recession, when the benefits of diversification were loudly espoused by asset managers, to mitigate the sting of a 50% drawdown.  The liquidity and simplicity of this investment vehicle would allow ease of administrative transactions, and avoid the conflict of interest with single stock selection.

Investing Social Security funds into equities is a logical step, matching the nationwide obligations of the public sector with the earnings potential of the private sector.  This swap in strategy should create broader portfolio diversification, and theoretically better returns over time.

Many research firms have commented on the viability of reallocating some invested assets to improve returns.  Brookings Institute projections for having the SSA trust participate partially in stocks look promising from a performance standpoint.

As shown in the subsequent graph, a blended portfolio of 40% equities and 60% bonds substantially outperforms the current allocation to all Treasuries.  Assuming nominal historic returns, the balance remains well above the 1.0 solvency ratio, thereby extending the longevity through the entire 21st century. [REF]

In terms of execution, the best strategy for switching OASDI from stocks to bonds would be to proceed slowly over a transitional period, to avoid market disruption while letting the current asset bubble deflate.  If possible, the government must avoid telegraphing their plans, considering the potential for large inflows which could be front run by savvy traders.

The public interest is certainly there, as Americans are already quite comfortable holding baskets of stocks in their individual retirement accounts.  Predictably, younger folks with a longer time horizon, have a higher risk tolerance, and appetite for equites, as economic theory suggests they should.

Specific to Social Security, a 2005 Washington Post poll found 2/3rd of 30-year-olds thought the trust should hold some stocks, with even 1/3rd of 65-year-old retirees in favor of the idea.  This survey was conducted in the midst of President George W. Bush’s unsuccessful attempt to restructure the program by creating private investment accounts.

Despite this lack of legislative action, appetite for improved returns amongst all Social Security participants remains high.  Thus, adding equities to the Social Security trust is not a question of if, but how.

Imputed:

Stocks have consistently returned 7% compounded over long periods of time, enabling a doubling of the account value in 10 years, while overcoming the damaging purchasing power reduction effects of inflation.  In contrast, over time bonds post 3% annually, when accounting for both yield and appreciation.  Considering the potential for rapid changes in interest rates, which can lead to capital losses, debt isn’t that much safer than equities as an investment vehicle on a risk-adjusted basis.

With life expectancies increasing, it’s important to keep a meaningful portion on one’s portfolio invested in stocks, even after retiring.  Life cycle funds have become increasingly popular in both mutual fund and ETF form, however many of these strategies transition too conservative too soon, eschewing growth for stability.

Specifically with regards to improving Social Security asset allocation, in 2005 the Federal Reserve Bank of St. Louis conducted a very thorough scientific paper on this topic.  The findings from this theoretical private investment account analysis were quite telling.

This study was conducted based on hypothetical 2003 calendar year retirees with a full employment record, earning the same inflation adjusted amount over their entire career.  The results were broken out across 4 separate income cohorts, and 3 different potential retirement age election.

The quartet of graphs below summarizes how this analysis was executed. [REF]  The fixed amount of amassed individual savings at retirement was turned into an annuity stream via monthly withdrawals.  While not offering the same inflation-adjusted payment consistency as traditional Social Security, both much larger initial withdrawal amounts, and extra funds even at the 100-year mark, especially for the stock simulation, are achieved despite deferring departure until 70.

The researchers determined investment in either an S&P 500 index fund or a 6-month CD generated a larger retirement portfolio, allowing distribution of more monthly income in nearly every scenario, improving outcomes for over 95% of the simulated individuals.

The only people who benefited from the current Social Security special-issue government bond allocation were low wage earners who lived into their mid-90s.  Not exactly a common occurrence, considering the bifurcated healthcare coverage experience throughout the United States.

The writers also surmised that future American workers will be even worse off, as they’re now contributing 12.4% of income as opposed to 10.7%, per the program amendments of 1983.  Thus, both investing intuition and scientific analysis confirms equities should be added to the Social Security strategy.

Ideally:

Social Security solvency solutions run the gamut: increasing revenue, decreasing payouts, or changing the investment allocation.  The key is to balance needs of retirees in the near run, with burden over workers of the longer term.  This is a classic juxtaposition between present and future societal benefits.

The most obvious fix to the Social Security funding gap would be to simply grow the tax revenue taken in, either by increasing the payroll rate, raising the income cap, or both.  However, this puts an increasing weight on a small number of workers to support a large number of retirees.

It’s estimated that a 3.5% rise to the FICA tax rate could ensure solvency of OASDI for another 75 years.  Sure, this would simply be kicking the can down the road, but at least gives legislators and individuals a runway to make more sustainable pension program improvements.

Another simple change is to increase the age benefits can be claimed, at least to mimic the increased life expectancy for aging Americans over the past century, as a result of modern health care advancements.  This adjustment was last done in 1983 under President Reagan, with the shift from 65 to 67, so probably warrants revisiting based on the many medical advancements benefiting the elderly that have been made since then.

One novel proposal is for people to have their own personal retirement accounts, rather than being lumped into the broader Social Security system.  Offering a voluntary choice would theoretically result in folks selecting the most beneficial option from a financial standpoint based on their individual situation.

However, politicians worry providing such an opt-out option would limit the amount paid into the general pool, especially amongst younger workers, those most concerned about future fiscal soundness, thereby threatening the entire Ponzi scheme.  Realistically, the current system already relies on the generosity of tomorrow’s tax payers to fund today’s entitlement obligations.

A final unique option is individual means testing based on net worth, as opposed to the blanket approach with tabulated monthly payments.  This overarching household asset value is more difficult to calculate than annual income, but some very rich folks, who definitely don’t need it, still get a lucrative Social Security stipend.  Howard Marks is one of many billionaires on record to have stated this sentiment.

Ignorance:

While there have been many proposals to modify, update, and potentially even fix the program over the years, only small tweaks were executed, with none sufficient to change the trajectory of the increasingly massive obligation.

At this point Social Security has grown so big and bloated that it’s now truly the 3rd rail of American politics.  No legislator is willing to address the issue, for fear of backlash from their constituents, which means losing their job in Congress.  Basically, no politician thinks with foresight when crafting legislative policy.  This lack of anticipation is what doomed the innovative Social Security system right from inception.

Case and point, as part of the recently passed One Big Beautiful Bill, a tax subsidy for seniors over the age of 65 was implemented.  This was an alternative work-around to the “no tax on Social Security” platform that President Trump ran on; legislative change to this large entitlement program cannot be made through the budget reconciliation process.  Good luck getting any 60-vote majority through the current highly polarized Senate.

One needs only to look at the email sent directly from the Social Security Administration to millions of Americans, erroneously guaranteeing the bill “eliminates federal income taxes on Social Security benefits for most beneficiaries” to see how politically manipulated this crucial pillar retirement has become.

This organization isn’t typically in the practice of blasting out news bulletins.  Especially considering the cognitively diminished and easily manipulated nature of many on the electronic list, folks who are unfortunately prone to online scams.

Diving into the true details, this provision provides an extra $6k topline deduction for seniors with MAGI under $175 of income.  With this change it’s anticipated that the number of elderly on Social Security who won’t pay any tax on their payments will increase from 64% to 88%.  This is a temporary measure, which will phase out in 2028 if not renewed.  This is a classic example of the short-term thinking that currently dominates Washington DC decision making.

This is exactly opposite from the type of policies needed to keep Social Security solvent, as it cuts incoming tax revenue.  Granted, from the start, it never made sense to have double levies on payments distributed from the Social Security fund.  However, the aging Baby Boomer cohort still represents the largest voting block in America, so their demands must be met to ensure political success at the polls.

The DOGE efforts under President Trump did make substantial cuts to the Social Security Administration’s staff, which helps very marginally from a financial solvency standpoint, but may hinder customer service moving forward.

Cracks in the Social Security dam have been evident since the last payment to the incredibly spry and long-lived Ms. Ida Fuller.  Yet, not only has the administration failed to apply any patches, but it continues aggressively filling up the burgeoning lake behind.  A flood is inevitable, with the only unknown being the timing.

Americans may have to brave retirement on their own, regardless of the Social Security they’ve been assured.  The program’s name is catchy, but not representative of the comfortable hammock net most citizens hope to plop down into as they age.  Like most elements of aging, only time will tell.

Insights:

Thorough history of the Social Security Act.  [REF]

List of governmental changes to SSA over time.  [REF]

Basics of Social Security drafted by the Center on Budget and Policy Priorities.  [REF]

Cato Institute commentary on public versus private retirement funds for individuals.  [REF]

Thoughtful piece from investment firm Evergreen Gavekal on the tortured past and future prospects for Social Security.  [REF]

Mathematical breakdown of how individual Social Security benefits are calculated.  [REF]

List of key values related to Social Security which are updated by SSA annually. [REF]

Heritage Foundation think tank report explaining the IOUs imbedded in Social Security.  [REF]

Table showing changes to OASDI and HI tax rates over time.  [REF]

2005 survey exploring American’s appetite to invest the SSA trust into stocks.  [REF]

Impact of recently passed OBBB on Social Security taxes and payments.  [REF]

Compiled list of online calculators that are beneficial for determining when to take Social Security. [REF]