Social Security Trust Fund Faces Depletion, Senators Propose Stock Investment Plan
The Social Security trust fund is projected to run out of money by 2032, which could lead to a 22% reduction in benefits if no legislative changes are implemented. In response, Senators Bill Cassidy (R-La.) and Tim Kaine (D-Va.) have introduced a proposal to maintain current benefits and avoid tax increases or cuts. Their plan involves the federal government borrowing $1.5 trillion to create an investment fund focused on stocks and other risk assets, alongside an additional $25.1 trillion in borrowing to cover the gap between Social Security's revenue and benefits over 75 years. The aim is for investment returns to pay down the total $26.6 trillion in new debt.
New projections indicate that the Social Security trust fund will deplete sooner than previously anticipated, potentially necessitating a 22% cut in benefits by 2032 unless reforms are enacted. For years, payroll tax revenues have been insufficient to cover current benefits, with the trust fund making up the difference. Once depleted, Social Security would only be able to disburse funds equivalent to incoming revenue.
Senators Bill Cassidy and Tim Kaine have put forth a plan designed to prevent benefit cuts or tax hikes. Their proposal suggests the federal government borrow $1.5 trillion to establish an investment fund comprising stocks and other risk assets. This fund would aim to accumulate gains over 75 years, offering potentially higher returns than Treasury bonds. Simultaneously, the Cassidy-Kaine plan would require an additional $25.1 trillion in borrowing to address the funding gap between Social Security's revenue and benefits during that 75-year period. The accumulated returns from the investment fund would then be used to repay the combined $26.6 trillion in new debt.
However, simulations conducted by the Boston College's Center for Retirement Research indicate that the senators' plan is unlikely to be successful. The proposal assumes nominal stock returns of 8.9% annually, which equates to approximately 6.5% after accounting for inflation. While applying a 6.5% real return annually over 75 years could theoretically grow the investment fund to $30.6 billion, simulations incorporating the volatility of equity returns show a different outcome.
The research found that even with an assumed 6.5% real return, investment returns would fail to cover the additional debt approximately 64% of the time. If less bullish assumptions are used, such as a 4% yearly real return on stocks, the investment fund would fail to pay off the debt in about 83% of simulations. This scenario would likely result in a significant increase in government debt, leading to substantial interest payments. The report also suggests that loading up on such a large amount of debt could negatively impact interest rates and the stock market, potentially lowering returns further.
The Boston College report does acknowledge the potential role of stocks in Social Security reform, suggesting that allocating 40% of the trust fund to stocks, in conjunction with tax increases or equivalent benefit cuts, could ensure solvency indefinitely in most simulations, thereby avoiding more severe future adjustments.
According to Fortune, the idea of using the stock market to bolster Social Security is not new, with President Bill Clinton having considered it in the 1990s.
