For generations, Social Security has served as the backbone of retirement security for millions of Americans. Yet, as the program barrels toward a projected funding crisis, the debate over its investment strategy and public understanding has reached a fever pitch. Recent reports from multiple sources—including a detailed analysis by AInvest and a sweeping new poll conducted by the Cato Institute and Morning Consult—paint a picture of a system at a crossroads, beset by structural risks and widespread confusion about its very foundations.
At its core, Social Security operates on a “pay-as-you-go” model. According to Newsweek, workers and their employers each contribute 6.2 percent of wages, up to a taxable earnings cap of $168,000 in 2025, under the Federal Insurance Contributions Act (FICA). These payroll taxes are not set aside in personal accounts for each worker, but are instead channeled into the Social Security Trust Fund, from which monthly benefits are paid to current retirees, survivors, and disabled beneficiaries. Yet, a new Cato Institute survey found that 55 percent of Americans do not know how Social Security is funded, and nearly a quarter (23 percent) mistakenly believe their Social Security taxes are saved in personal accounts exclusively for them. Another 32 percent admitted they simply do not know how the system is financed at all.
“Social Security is often considered a ‘third rail’ issue in American politics,” Newsweek notes, “meaning that targeting it for notable cuts or changes could be politically perilous to members of either party.” But peril may be unavoidable. The 2023 Trustees Report projects that the Old-Age and Survivors Insurance (OASI) Trust Fund will be depleted by 2033, with payroll tax revenues covering only 77 percent of scheduled benefits thereafter, as reported by AInvest. The Disability Insurance (DI) Trust Fund is also on track for insolvency, with both funds expected to reach a cliff by 2034 according to the Trustees. If Congress fails to act, benefits would rely entirely on incoming payroll taxes, resulting in a 21 percent shortfall.
This looming shortfall is not unprecedented. In the early 1980s, Social Security’s trust funds also teetered on the brink of insolvency. Congress responded with a series of reforms: accelerating payroll tax hikes, gradually increasing the retirement age, and taxing a portion of Social Security benefits. Whether today’s gridlocked lawmakers can muster similar resolve remains to be seen.
But the funding crisis is only part of the story. The investment strategy underpinning Social Security is itself under scrutiny. The program’s trust funds are invested exclusively in non-marketable U.S. Treasury securities—a strategy designed to preserve capital and ensure liquidity. While Treasury securities are considered risk-free in terms of default, they expose the system to three critical vulnerabilities, according to AInvest: inflation erosion, demographic imbalances, and systemic liquidity risks.
Inflation has become a particularly thorny issue. The effective interest rate on the special issue debt held by Social Security has risen to 4.75 percent, the 2023 Trustees Report notes. But that figure pales in comparison to the 8.2 percent annualized returns of inflation-linked assets like real estate investment trusts (REITs). As inflation continues to bite—sometimes unpredictably—the real value of Social Security’s fixed-income assets is at risk.
Demographics are another major concern. The worker-to-beneficiary ratio has plummeted from 5.1 in 1960 to just 2.7 in 2025, with projections indicating a further decline to 2.2 by 2045. This means fewer workers are supporting more retirees, a trend that strains the system’s ability to absorb shocks, especially as Americans live longer and healthcare costs rise. Annual healthcare expenses for retirees are now projected to range from $3,400 to $7,500, according to AInvest.
Systemic liquidity risks round out the trifecta. If the federal government ever faces fiscal constraints—such as a debt ceiling crisis or a sudden liquidity crunch—the ability to redeem Treasury securities at face value could be compromised, potentially triggering broader financial instability.
In contrast to Social Security’s rigid approach, some public pension systems have started to diversify. New York City’s public pension systems, for example, recently increased their allocations to alternative assets like private equity and real estate to 34 percent, aligning with a growing national trend. Norway’s Government Pension Fund Global, often cited as a global best practice, allocates 60 percent to equities and 40 percent to fixed income, with a particular focus on emerging markets. Meanwhile, U.S. Social Security’s 100 percent allocation to Treasury securities looks increasingly outdated.
Despite these vulnerabilities, confusion among the American public persists. The Cato Institute’s August 2025 survey found that while 60 percent of respondents recognize that workers who pay more into Social Security receive larger benefits, 15 percent incorrectly believe all retirees get the same amount, and another 25 percent are unsure. When asked about the scale of Social Security benefits, a staggering 91 percent were unaware that the maximum annual benefit can reach $60,000. The average monthly benefit is $2,005.05 as of June 2025—just over $24,000 a year before taxes. Only 25 percent of those surveyed correctly estimated that the average benefit falls between $20,000 and $29,000 per year; 38 percent underestimated it, 17 percent overestimated, and 19 percent said they were unsure.
Taxation further complicates the picture. Up to 50 percent of Social Security benefits are taxable, depending on income levels. Yet many Americans are unaware of this, and the program does not incorporate tax-advantaged vehicles like Health Savings Accounts (HSAs) or Roth IRAs, which could help mitigate the burden.
What’s the path forward? According to AInvest, policymakers need to adopt a strategic asset allocation framework that prioritizes inflation-protected assets, healthcare-linked equities, alternative income streams, and tax-efficient structures. This would mean increasing allocations to TIPS, REITs, and commodities to preserve purchasing power, investing in companies aligned with demographic trends, and exploring private infrastructure and dividend-paying equities for stable cash flows. “Government-managed Social Security market exposure is a flawed solution because it prioritizes short-term solvency over long-term resilience,” the report concludes. “The time for reform is now—before the OASI Trust Fund’s depletion in 2033 becomes an irreversible crisis.”
As the debate intensifies, one thing is clear: Social Security’s future will depend not just on political will, but on a broader public understanding of how the system works—and why it needs to change. With the clock ticking toward insolvency, the stakes for retirees, workers, and policymakers alike have rarely been higher.