Social Security requires options beyond gambling on dubious ventures
The U.S. faces an impending crisis with the Social Security Trust Fund projected to run out of money by 2034, potentially leading to a 23% reduction in benefits if no action is taken. To address this issue, Senators Bill Cassidy (R-LA) and Tim Kaine (D-VA) have proposed a novel solution: a separate $1.5 trillion investment fund dedicated to Social Security.
This fund, designed to run in parallel with the existing Social Security Trust Fund, aims to extend the solvency period and protect benefits. The key features of the plan include investing the new fund in a diversified portfolio of stocks, bonds, and other higher-yield investments, starting with a $1.5 trillion upfront investment deployed over 10 years, and allowing the fund a 75-year holding period to mature before withdrawals begin.
Proponents of the plan see it as an "out-of-the-box" bipartisan thinking that leverages market returns to bolster Social Security’s financial health. However, critics raise concerns over the risks inherent in market-based investing, such as historical volatility in public pension funds and uncertainties about replicating past market returns.
Economists like Teresa Ghilarducci argue that similar approaches have at times backfired in volatile markets and that this strategy may have been more suitable decades ago when longer time horizons allowed for risk mitigation. Gopi Shah Goda of Brookings points out that the plan may introduce new risks without addressing the underlying structural imbalances in Social Security funding.
Allison Schrager of the Manhattan Institute emphasizes the need for cautious assessment of the long-term risk-return trade-offs and notes that investing $1.5 trillion via debt financing has significant financial implications. She uses the Canadian Pension Plan as a successful comparative model but stresses no guarantees exist for replicating past success over the next 75 years.
If implemented effectively, with smart risk management and realistic expectations, this proposal could help reduce the debt and offload some of the burden from future taxpayers. However, it requires careful evaluation of market risks, investment strategies, and timing, especially considering the program’s urgent short-term funding challenges.
The proposed new fund would be seeded with $1.5 trillion, presumably financed with debt. If all $1.5 trillion of the new Social Security fund were in U.S. markets, it could have distortionary effects as the S&P itself is worth about $50 trillion. The senators estimate that, in 75 years, the fund will have earned enough to pay back the Treasury $25.1 trillion and fund future benefits.
Historically, the Social Security program has often taken in more in taxes than it paid in benefits. Canada's CPP fund, which has a large share of its funds abroad, with only 14% invested domestically, has delivered higher returns for Canadian retirees. The senators' proposal requires at least a 5% real return each year, more if interest rates increase.
This article is not intended to express opinions but to present the facts surrounding the Cassidy-Kaine proposal for a separate Social Security investment fund. As the debate continues, it is crucial to consider the potential benefits and risks associated with this innovative approach to modernizing Social Security investments.
- The proposed Social Security investment fund by Senators Bill Cassidy and Tim Kaine aims to extend the solvency period of Social Security by investing $1.5 trillion in a diversified portfolio, running in parallel with the existing Social Security Trust Fund.
- This novel approach, known as an "out-of-the-box" bipartisan thinking, leverages market returns to bolster Social Security’s financial health, but raises concerns over market-based risks, such as historical volatility and uncertainty about replicating past market returns.
- If implemented effectively and with smart risk management, the Social Security investment fund could help reduce debt and offload some of the burden from future taxpayers, but requires careful evaluation of market risks, investment strategies, and timing, especially considering the program’s urgent short-term funding challenges.
