Investing Social Security trust funds in stocks instead of bonds would be a bad idea.

This is because equities do not always outperform bonds over the long term. Social Security could end up in much better financial shape if its trust funds were invested in stocks instead of Treasury bonds, which current law requires it to do.

Proposals to invest some or all of Social Security funds in equities are certainly not new. Now the opportunity to revisit these proposals comes from the latest actuarial analysis of the Social Security Trust Fund, released earlier this month, which showed that, unless something changes, Social Security will be able to pay only 77% of scheduled benefits starting in 2034. Policy options to overcome this shortfall have focused on either payroll tax increases or benefit cuts, or some combination of the two.

Read: Social Security is now projected to be unable to pay full benefits a year earlier than expected

Neither of these options is politically feasible, of course, since raising taxes is politically suicidal and cutting benefits—abandoning government promises—is no less politically toxic. Social Security Trust Fund investments in equities are attractive because they seem to offer politicians an escape from the horns of this dilemma. If the trust fund can earn more from stocks than bonds, neither payroll taxes will have to be raised nor benefits will be cut.

My argument against these invest-Social-Security-in-stocks proposals is not that stocks are more volatile than bonds. That point has been made many times before, and it is certainly true. But proponents of these propositions have a catch: As long as you hold for a long-enough period, they argue, stocks will almost certainly outperform bonds. And since Social Security funding is a long-term proposition, short-term volatility in stocks shouldn’t pose an insecure barrier.

Read: A Social Security fix that should be on the table

But this is where proponents of invest-Social-Security-in-stocks proposals are wrong: Stocks don’t always perform better than bonds, even over the long term. Most proponents of invest-Social-Security-in-stocks proposals are guilty of extrapolating only one part of American history, inadvertently ignoring other periods in which stocks have performed less well, relative to bonds.

I base these objections on research by Professor Emeritus Edward McQuarrie at Santa Clara University’s Leavey School of Business, in which he created a database of US stock and bond returns dating back to 1793. McQuarrie found that there were three distinct periods. Throughout US market history, the returns of stocks relative to bonds have differed in each, of more or less equal length.

These differences are plotted in the accompanying chart. Note that in the recent period, represented by the blue columns, it has been the case that the probability of stocks outperforming bonds increases with holding period. As you can see, there hasn’t been a 30-year or 50-year period since 1943 in which stocks have underperformed bonds.

Compare that experience with the 1794-to-1862 period, represented by the red columns. Note that, during that period, stocks outperformed bonds below As the holding period increased. In fact, over the 30-year and 50-year horizons, there was only a 1% chance that the stock would outperform, according to McQuarrie’s statistics for this period.

The period between these two extremes, from 1863 to 1942 and represented by the green columns on the chart, exhibited yet another pattern. Now there is no correlation between holding period length and the likelihood that stocks will outperform bonds. Even over a 50-year horizon over this period, for example, there was only a 50% chance that stocks would outperform bonds.

These widely divergent odds that stocks outperform bonds put in a new light the concerns many feel about Social Security’s finances. They tear their hair out over the possibility that Social Security will pay only 77% of scheduled benefits beginning in 2034. And, yet, many of them propose to invest the Social Security Trust Fund in stocks, leading to much greater uncertainty than exists under the current financing arrangement.

In an email, Professor McQuarrie reminded us that proponents of invest-Social-Security-in-stocks proposals are not only guilty of ignoring the pre-World-War-II experience with US stocks and bonds. They are also guilty of ignoring the withdrawal history of other countries alongside the United States. This is a major oversight, because as a general rule, the long-term equity returns of those other countries are significantly lower than those of the US.

The bottom line? Focusing on the entire history of U.S. stock and bond returns since America’s birth, we can see that investing-Social-Security-in-stocks propositions are unacceptably risky. And when we expand our focus to include the full history of stock and bond returns outside the US, we find that these propositions are even riskier.

We should discourage our elected representatives from thinking they can solve the Social Security deficit by transferring them to trust funds.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at [email protected].

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