Larry Fink calls for Social Security reform, says investing a portion of funds could strengthen the program

BlackRock CEO Larry Fink discussed possible Social Security reforms that would allow more Americans to benefit from the growth in the stock market while also ensuring the program is strengthened so it can survive to serve future generations.

Fink's recently released annual chairman's letter touched on how Social Security is "one of the most effective poverty-prevention programs in history" and that while it provides stability, it "doesn't allow most Americans to build wealth in a way that grows their country."

"Today, the system operates largely on a pay-as-you-go basis. Payroll taxes are used to pay current retirees, and the Social Security trust fund is invested primarily in U.S. Treasury bonds. In effect, workers lend money to the government and receive defined benefits in return."

"The structure, designed as a social insurance program, emphasizes stability and predictability. What it doesn't do is let people grow their benefits along with the broader economy. The question is whether the Social Security system could allow both," Fink said. 

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He said that this could be accomplished by asking whether a portion of the system could be invested "carefully, broadly, and over decades" like other long-term pension systems.

"This would not mean privatizing Social Security or putting it all into the stock market," Fink wrote. "It would mean introducing a measure of diversification, similar in principle to the federal Thrift Savings Plan, which manages retirement savings for millions of federal employees." 

"The goal would be to strengthen the system over time while preserving its core guarantees," he added.

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Fink noted a bipartisan proposal from Sens. Bill Cassidy, R-La., and Tim Kaine, D-Va., that would create a new investment fund that operates parallel to the existing trust fund rather than replacing it while investing in a diversified mix of stocks and bonds to generate higher returns.

The proposal would require an initial investment of about $1.5 trillion and would be given 75 years to grow, and during that period the Treasury would continue covering Social Security benefits. 

Once the fund matures, it would repay the Treasury and then supplement payroll taxes going forward to help close the gap between what the Social Security system takes in and what it pays out – while no one on Social Security or nearing retirement would see a change to their benefits.

Fink also noted that about six million Americans who are employed by state and local governments don't currently contribute to Social Security and instead rely on public pension systems that invest in diversified portfolios.

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Other examples of alternative pension systems can be found overseas, with Australia's superannuation system representing an approach that invests retirement contributions in the financial markets. Fink said that a "similar, carefully structured approach could be considered to strengthen Social Security."

"I understand why any talk of changing Social Security makes people uneasy. Social Security is a core promise, and people rightly believe it should be honored. But under the current system, doing nothing could very well break that promise," he said.

"Current projections show the trust fund won't be able to pay full benefits by 2033. Many young Americans doubt they'll ever fully see theirs," he explained. "Addressing that gap will likely require multiple solutions. But thoughtful, long-term investing could be one of them."

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An analysis by the nonpartisan Committee for a Responsible Federal Budget (CRFB) noted that when Social Security's main trust fund reaches insolvency – which is projected to occur in 2032 – federal law requires benefits be cut to match revenue from payroll taxes, which would amount to a roughly 24% cut for beneficiaries.

Fink noted that his chairman's letter two years ago was focused on rethinking retirement and generated criticism for suggesting that Social Security was in need of reforms. He acknowledged that the latest letter may do the same, but said it's a conversation that needs to be had.

"In my 50 years in finance, if there's one thing I've learned, it's that the problems we don't talk about are the ones that should worry us most. And that's exactly why we need the conversation now – because the cost of waiting is only getting higher," he said.