Is This the Least Painful Way to Save Social Security?

Everybody knows that Social Security is a financial mess. But perhaps America can look to its northern neighbor for one idea on how to tidy up the program.

The Canada Pension Plan is that country’s counterpart to Social Security. It provides a monthly benefit to Canadian citizens after they stop working.

But unlike Social Security, the Canada Pension Plan is in great shape. Writing in The Wall Street Journal, Terrence Keeley and Andy Puzder report that fund assets in the Canadian program “are running comfortably ahead of liabilities and are projected to do so in perpetuity.”

The health of Canada’s federal retirement plan stems from the Canadian government’s decision to invest more of the program’s funds in the stock market. The WSJ reports that 57% of Canada Pension Plan assets are invested in equities.

An additional 12% is invested in bonds. The rest of the money goes into investments such as real estate and credit.

That asset allocation has been a boon for the Canada Pension Plan. Over the past decade, it has realized a 9.5% annualized net return, the WSJ reports.

By contrast, Social Security invests only in unmarketable U.S. federal-debt equivalents. Such investments tend to generate returns far lower than what can be earned in the stock market.

Partially as a result, the federal government’s latest projection for the Social Security retirement trust fund is that reserves will be depleted in 2033. At that point, incoming funds would cover only 77% of all scheduled benefits.

Canada is not alone in its approach to using the stock market to boost returns on the assets in its pension plan.

About 30 years ago, Sweden also looked to the stock market to solve funding issues with its own federal retirement program. According to a 2023 report from MarketWatch columnist Paul Brandus:

“Instead of putting 100% of payroll taxes into an equivalent of our Social Security trust fund, the Swedish government withholds a portion — equal to about 2.5% of wages — and deposits it into individual pension accounts. Workers can invest their own money in up to five different funds offered by independent fund managers. What if you don’t want to choose, or you aren’t sure what’s best for you? There’s another fund that automatically does it for you, and you can modify it at any time.”

So, should the U.S. begin to invest some Social Security funds in the stock market? Keeley, CEO of Impact Evaluation Lab, and Puzder, former CEO of CKE Restaurants, write in the WSJ report that “by adopting market-based solutions, Americans can enjoy more financial security in their golden years.”

But not everyone agrees.

In a report last year, the Center for Retirement Research at Boston College acknowledged the success of Canada’s approach. But the center added that the Social Security trust fund is “careening towards zero, and rebuilding the fund may not be wise or feasible.” It concluded:

“While experience suggests that equities could work for Social Security, the time may have passed.”

Brandus in his MarketWatch column also cites a report from Munich-based asset-management firm Allianz that noted while developing countries might find the practice of tapping into the stock market to be profitable for their retirement programs, stabilizing pension systems in countries such as the U.S. will “hardly be possible without painful reforms.”

That conclusion causes Brandus to muse on how much healthier Social Security might be today if the nation had followed President George W. Bush’s suggestion to partially privatize the program.

When Bush unveiled his plan in early 2004, the Standard & Poor’s 500 index stood at 1,138. On March 1 of this year, the index ascended to a record high of 5,137.