Although it is one of the most popular and successful government programs in U.S. history, Social Security faces a long-term financing problem, and the Social Security Trustees project that the trust funds will be depleted in 2041. The 1994–96 Advisory Council on Social Security recommended that trust fund investment income be increased as part of the solution to the long-term financing problem.
Proposals to address Social Security’s long-term insolvency have included diversification of trust fund assets. This AARP Public Policy Institute Issue Paper examines the effect on trust fund solvency of investing trust fund assets in Government National Mortgage Association mortgage-backed securities (MBS), which are guaranteed in principal and interest by the federal government but carry a higher yield than U. S. treasury bonds.
Several scenarios are modeled, assuming different percentages of assets invested in MBS, different rates of return, and different investment periods. The most optimistic results yield a two-year extension in the solvency of the trust funds, indicating that this type of trust fund diversification would not alone solve the long-term financing problem, but could contribute to closing the long-term financing gap.
The author of this Issue Paper, Thomas Hungerford, is a private economic consultant who was formerly with the Social Security Administration and with the Levy Economics Institute. (55 pages)
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