One way to strengthen Social Security and reduce the size of the benefit cuts and tax increases that will be needed to fund the system over the long run is to increase the returns earned by the reserves held by the Social Security trust fund. Since the program's inception in the mid 1930s, the Social Security Act has required that these reserves be invested exclusively in safe, but low-yielding, government bonds. This restriction mattered little until recently because Social Security had only meager reserves to invest. After the 1983 reforms, however, the system's reserves began to grow and by 1991 they exceeded the amount experts considered necessary to tide a "pay-as-you-go" system over a period of deep recession.

Currently, the trust fund reserves total $785 billion--enough to finance two years of benefit payments--and by 2020 they will exceed $4.4 trillion dollars. If reforms are adopted, the reserves could easily swell to several times this level. So we are talking about fairly sizeable reserves--and the returns these reserves earn can have a huge impact on the long-run financial health of the Social Security program.

Over the next few decades, the government bonds that the reserves are currently invested in are expected to yield about 3 percent more than the rate of inflation. Investments in a diversified portfolio of common stocks, corporate bonds, and government guaranteed securities could double that yield and cut the long-run problem facing the program roughly in half.

So why don't we invest these growing Social Security reserves in assets that would generate a higher rate of return? To answer this question we should look at the two reasons why Congress decided back in 1935 to restrict the trust fund's investments to government bonds. One was the economic conditions of the time. In the middle of the Great Depression, few people wanted to sock away their retirement nest eggs in the highly unstable stock and corporate bond markets.

The second and more important concern of Congress was that politicians--like themselves--might be tempted to use reserve investment policy to interfere with markets or meddle in activities of private businesses.

The concerns that Congress had in 1935 were certainly legitimate ones. But conditions have changed. Stock and bond markets are far larger, less volatile, and more efficient now than they were in the 1930s, 1940s and 1950s. Moreover, the concept of investing passively in a broad index of bonds or stocks, which was unheard of then, is widely accepted for long-term retirement investing purposes today.

But what about the potential for political interference? If there were no way to reduce this risk to a de minimis level, investing a portion of the trust fund reserves in private assets would be imprudent. Fortunately, institutional safeguards can be established to provide the necessary protections. Such an institutional framework should have five elements.

First, an independent agency, modeled after the Federal Reserve Board, should be created and charged with the task of managing the trust fund's investments. The members of this investment board should be chosen for their integrity and financial expertise and should serve staggered terms of 10 years or more years.

Second, this agency should be required to select, through competitive bids, several private sector fund managers, each of whom would be entrusted with investing a portion of the fund's reserves in private securities.

Third, these managers should be authorized only to make passive investments, that is, investments in securities of companies chosen to represent the broadest of market indexes. In other words, there would be no picking and choosing of individual stocks. The index would not reflect only a portion of the market, such as the Dow Jones index or Standard and Poors 500, but rather indexes, such as the Wilshire 5000, that reflect all of the stocks traded on the major exchanges.

Fourth, Social Security's investments should be commingled with the monies that private individuals have entrusted to these same fund managers for investments in similar index funds.

Finally, the fund managers should be required to vote Social Security's shares solely to enhance the economic interest of future Social Security beneficiaries.

All of these elements should required by legislation. Of course, any law that Congress enacts it can change, but the president would have to sign that bill and a powerful constituency would develop that supported a hands-off policy for the trust fund reserves.

Nevertheless, investing a portion of the growing Social Security reserves in private sector securities would give participants in the program a more equitable share of the benefit that increased Social Security reserves provide for the overall economy. Such a change would improve the return today's workers will get on their Social Security contributions without exposing them to the market risks and high administrative costs that would come if such investments were made through individual retirement accounts.