As a member of the Pennsylvania House of Representatives, when we were examining potential solutions to the funding problem of Social Security, I heard repeated comments that Social Security is an entitlement. 

While in the Legislature, I was the speaker’s majority appointee to the Public School Employee Retirement System (PSERS).  As vice chair of the system and its Audit Committee chair, all the other board members and I were continuously reminded that we had a fiduciary responsibility to the members and beneficiaries of the fund.

For some unknown reason, that same standard of fiduciary due care is not extended to Social Security recipients.

When Social Security was established, it was intended to be a self-funding system from the employer and employee contributions.  This self-funding is why Social Security is not an entitlement.  The fund is, instead, a horribly managed defined benefit pension plan — horribly managed by legislation, not by negligence.

The advent of DOGE (the Department of Government Efficiency) has provided the mechanism, impetus, and political will to challenge the status quo.

Concerns about the solvency of the Social Security System have been bandied about for decades.  Solutions have, unfortunately, focused on increasing the Social Security tax rates, increasing retirement age, increasing taxability of benefits, and in some extreme cases making Social Security benefits “needs”-based.

No one has discussed the elephant in the room, which is the manner in which the funds are invested.

Virtually all prior alternatives investigated, including the GAO’s reform proposals, ignore the most significant flaw in the entire Social Security System analysis: investment performance and returns.

There is a fundamental flaw in the Social Security System as it is currently designed in that the trustees are limited as to the investment options they can consider.  This limitation causes trustees to invest in U.S. government bonds and notes only. 

No fiduciary in any other pension plan would be considered a “prudent” trustee by limiting investments to U.S. government bonds and notes.

This investment limitation provided an opportunity for the Federal Reserve during the financial crisis of 2008 and the implantation of quantitative easing to effectively penalize Social Security investment earnings when interest rates on U.S. government bonds and notes plummeted to near zero for well over a decade.  This irresponsible raiding of the Social Security trust funds and limitations on investments by plan trustees negatively impacted the fund and increased the likelihood of insolvency.

Due to quantitative easing, the Social Security funds are estimated to have been “short-changed” by over $2.1 trillion in lost earnings due to monetary policy.

For example, in March 2019, I introduced House Resolution 167 seeking restitution from the federal government for Q.E. impact on state-managed pension funds.  For Pennsylvania, the shortfall of earnings amounted to $24 billion.

Based on my experiences with pension plans and in the Legislature, I find it important that Congress provide for a Social Security Restitution Act at the federal level with focus on the investment side of the problem.  Such restitution, if enacted, would permit all other aspects of the current Social Security system to remain unchanged.

Under this scenario, the Social Security trust fund would be replenished with the lost opportunity cost during the period of 2008 to 2023 for the Federal Reserve’s use of Social Security trust funds at near-zero interest rates.  This near-zero rate of return compares negatively to the approximate 6.5% expected earnings rates in any other prospective pension plan.  

Obviously, the transfer or restitution immediately impacts the federal debt.  However, the transfer starts the process of breaking the perception that Social Security is an entitlement.  It will, concurrently, put more pressure on the Executive Branch and Congress to bring spending under control.  DOGE is a critical step in this process.  It also has the impact of preventing Social Security funds from being diverted from the primary beneficiaries at their expense to further some other agenda.

The “earnings” lost during the period of quantitative easing, at an expected earnings rate of 6.5% only, amounts to $2.157 billion.  Should a higher or actual pension plan earnings rate be applied, the opportunity cost for 2024 would be significantly higher.  The restitution to the Social Security fund since the inception of Social Security is in the range of $6 trillion.

For full implementation of the change, Social Security trustees would be permitted to invest in investments typically allowable in financial markets with the caveat that all shares would be non-voting to preclude government interference.  The investment criteria would exclude certain countries as designated by Congress from time to time.

Fund investments would be permitted in ETFs, mutual funds, guaranteed insurance products of a portfolio mix, and the like.  Direct investment in any company would be prohibited.  All such fund shares would be non-voted and limited to no more than 10% of any fund.

Once a balance portfolio is fully enacted, other options are available to enhance Social Security solvency. 

It takes pollical will to solve the Social Security insolvency problems.  The system insolvency year is 2033!  Changes must be implemented immediately to avert a full blown crisis.   

Social Security is not an entitlement, and it is time to consider the beneficiaries for whom we have a fiduciary responsibility.  Solve the problem!

Frank Ryan, CPA, USMCR (ret.) represented the 101st District in the Pa. House of Representatives and served on the PSERS Board for over three years while a member of the House.  He is a retired Marine Reserve colonel and a CPA and specializes in corporate restructuring.  He has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at FRYAN1951@gmail.com.

Image: JD Lasica via Wikimedia Commons, CC BY 2.0 (cropped).