How to Save Social Security Without Privatizing or Cutting Benefits

 How about a plan that strengthens Social Security trust funds while letting all Americans earn more generous retirement benefits? Not what you normally hear when people discuss Social Security, right? Conversations tend to be about shrinking benefits and increasing taxes as the system careens toward bankruptcy. It turns out, however, that we can vastly improve Social Security and retirement income over the long run without doing either. By adopting market-based solutions, Americans can enjoy more financial security in their golden years.

Against the backdrop of a $6.5 trillion federal budget this fiscal year and a projected $1.6 trillion deficit—on top of our $34 trillion in federal debt—the $1.4 trillion coming due this year alone for Social Security payments makes it seem as if increasing taxes and lowering benefits are the only plausible policy options to ensure the U.S. can continue funding Social Security. Add the Social Security and Medicare Board of Trustees’ projection that the Social Security trust funds will run out by 2034, and the need for reform is obvious. Yet no elected leader has offered a credible plan to save the system, let alone increase benefits.

Here are two solutions with proven track records—neither of which would privatize the system or change benefit levels for those at or near retirement.

First, we can shore up the funds available to pay retirement benefits by creating a low-risk diversified investment plan that takes advantage of long-run equity returns, which are superior to the return on bonds. This is how most wealthy individuals protect their assets and maximize their retirement security. The same strategy can work for every American. Canada has already invested its government retirement system assets in a diversified portfolio that is yielding impressive results.

Second, every American should have the same option that every federal employee has had since 1986: to participate voluntarily in the Thrift Savings Plan, a federal multiasset investment program. For decades, this plan has generated retirement wealth. Under both solutions, stock markets would benefit every retiree, not just the rich.

The Social Security system is headed for insolvency largely because it has restricted itself to investing exclusively in unmarketable U.S. federal-debt equivalents. Because bonds return only half of what stocks return over any multidecade time frame—about 5% a year vs. 10%—Social Security expenses are now running well ahead of receipts. By contrast, in Canada, federal retirement-fund assets are running comfortably ahead of liabilities and are projected to do so in perpetuity.

The Canada Pension Plan’s superiority stems from its asset allocation. The fund invests about 57% of its assets in equities and 12% in bonds; the rest is divided among real estate, infrastructure and credit. Over the past 10 years, the Canada Pension Plan has realized a 9.3% annualized net return. Similarly to how Social Security works, Canadian citizens pay into the program and are guaranteed lifetime benefits. Participation in the plan is mandatory for all Canadian citizens, as is the case with Social Security in the U.S.

Before 2008 the ratio of federal retirement trust fund assets to outlays was roughly equal in Canada and the U.S. Since then, the ratio of assets to outlays has diverged sharply with Canadian assets rising and U.S. assets falling because of U.S. reliance on bonds. Canadians can look forward to the possibility of rising federal retirement benefits for the next century. By contrast, if the U.S. doesn’t adopt our proposed solutions, Americans will suffer from reduced retirement benefits, higher taxes, or both.

In the U.S., the Thrift Savings Plan—with about 6.5 million participants—has for decades helped federal employees invest part of their pay in a range of target-date and multiasset funds.

Target-date funds, which automatically match investment strategies to an individual’s planned retirement date, ensure beneficiaries have higher equity exposures when they are young and higher bond exposures when older, making retirement income more predictable.

From 2013-23, the average annual return on the Thrift Savings Plan’s common-stock index fund matched the performance of the S&P 500 index at 12.61%. Since its inception 38 years ago, that common-stock index fund has returned 10.83% per year. Americans should be able to allocate some of their pretax salaries to such successful funds.

In 2005 President George W. Bush tried to reform Social Security by partially privatizing the system. The effort failed because both liberal and conservative interest groups, including the AARP, demonized privatization as too risky.

Our solution wouldn’t privatize the system. Rather, it would let Americans invest some of their pay in low-cost index funds, including a high-return fund consisting of 500 of the largest U.S. companies. That would especially help those who depend solely on Social Security.

Last year only 61% of U.S. households owned some stocks. That’s a shame. The U.S. should follow Canada’s lead so all Americans have access to superior equity returns.

Terrence Keeley is CEO of Impact Evaluation Lab and author of “Sustainable” and the forthcoming book “Ending ESG Investing.” Andy Puzder is former CEO of CKE Restaurants, a distinguished fellow at the Heritage Foundation and a senior fellow at Pepperdine University.

https://www.wsj.com/articles/how-to-save-social-security-without-privatizing-or-cutting-benefits-canadian-example-f18f0600