For years now we’ve heard doomsayer predictions that the Social Security Trust Fund will be depleted by 2034, at which time they may have to slash benefits. But that’s not the only reason to be worried. According to MarketWatch, Social Security is heading toward insolvency because — quite simply — it’s a bad investment. It says the investment strategy behind America’s largest pension plan is underperforming because it hasn’t changed since 1935.

Bad Investment

Last year, the trust fund earned a mere 2.5 percent on every dollar invested. At the same time, the financial markets saw a banner year. The article reported that the S&P 500 index shot up 29 percent, international stocks were up 11 percent, real estate trusts increased by 32 percent, and commodities rose 26 percent.

Making matters worse, the fund’s returns were less than half the rate of inflation. In simple terms, that means workers lost 4 percent of their money’s purchasing power.

This bad investment strategy is not limited to this past year. Social Security’s investments have underperformed basic pension fund benchmarks in four of the last five years, and in two-thirds of all years since 1980. The average underperformance during the past four decades has been about 4.5 percent a year.

Here’s the Problem

The problem is that under the terms of the Social Security Act of 1935, Social Security must invest all of its money in U.S. Treasury bonds, while most other pension plans diversify with more profitable stocks, real estate and other assets. That strategy may have been fine way back then when the country was still reeling after the great Wall Street crash and President Franklin D. Roosevelt needed money to go into government bonds to help pay for his New Deal. But what was good plan in 1935 is not good today.

Bonds are no longer a smart investment — and haven’t been for quite a while. The article reported that since the mid-1930s, U.S. stocks have outperformed Treasury bonds in total by more than 6,000 percent. The average big U.S. pension plan, other than Social Security, expects to earn an average return of about 7 percent a year nowadays. Right now, Social Security is still investing all new FICA taxes in bonds paying 1.5 percent interest.

Call for Change

Perhaps it’s time for lawmakers to update this antiquated investment plan. The article states that “if the trust fund had been invested in a regular mixture of stocks and bonds throughout its history, like every other pension plan, there would be no funding crisis.” Congress could act to change the rules on how Social Security revenues are invested to generate bigger gains. This could help fill the shrinking trust fund coffers.

The Seniors Trust maintains Congress needs to act now to secure the long-term solvency of our Social Security program. It wants to see the Social Security Expansion Act enacted. This landmark piece of legislation would secure its Trust Fund, establish a fair annual cost-of-living adjustment (COLA), and immediately put more money in seniors’ pockets by raising monthly benefits.