Financial Analysts Journal

Saving Social Security: A Better Approach

  1. Thomas K. Philips
  2. Arun Muralidhar, PhD

The disappearance of the defined-benefit (DB) pension plan is one of the greatest financial tragedies to befall the U.S. citizen. As demographics have changed and as defined-contribution (DC) plans have become the primary vehicles for retirement savings, retirement planning has become fraught with uncertainty. This article argues that DB plans, such as the U.S. Social Security system, are fundamentally superior to DC plans and that the Social Security crisis is largely a crisis of demographics and funding. Social Security’s assets should be invested in a single portfolio that holds both stocks and bonds, and its risky return should be swapped for a fixed return to enable the provision of a DB. This proposal inexpensively affords insurance against a market decline and allows pensions of any kind to be made portable.

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