It also shifts Congress’s focus to truly addressing social security.
Senator Bill Cassidy (R-LA) resurrected his proposal – this time with co-author Senator Tim Kaine (D-VA) to build a trust fund and use borrowed funds to invest in stocks and other high-yield assets to address social security financing. It’s great to see the Senators take some initiative to address the financing of Social Security, but it’s a great thing in these polarized times, seeing bipartisan efforts and providing some equity investment for any Social Security Trust, and Cassidy-Kaine’s proposal isn’t a good idea. It introduces new risks into the funding structure and avoids addressing fundamental imbalances in the plan.
The basic plan is that the federal government will borrow $1.5 trillion over the next decade. The current borrowing rate is about 5%. The funds will be invested in stocks and other risky assets, which are expected to receive higher returns than Treasury bonds. New trust funds will be allowed to remain unchanged over the next 75 years. During that time, the federal government will borrow additional amounts to cover the annual shortage of Social Security. At the end of the accumulation period, the trust fund will repay the principal and interest of the original borrowing amount of the Treasury. Any remaining gains – due to the difference between the interest rate of the Treasury and the expected return on venture capital, it can be used to compensate the Treasury for paying Social Security benefits during this period.
To support their proposal with a real-world example, Senators Cassidy and Kaine pointed to the success of the Railway Retirement Investment Trust, which has a diverse portfolio of assets to ensure benefits are paid to railway workers. If equity investment is a problem, it can also be pointed out that successful investment policies for Canadian pension plans and Ontario teachers’ pension plans.
The problem with these comparisons is that these other plans do not rely on borrowing money. Instead, the money comes from tax revenue or employee contributions, which are then invested in stocks and bonds. As a result, all accumulated reserves can pay for the promised benefits. In contrast, in the Cassidy-Kaine proposal, the only gain that can support Social Security is the expected difference between Treasury bond interest rates and stock returns. The expected return of stocks is high, only making up for the risks taxpayers will bear. In short, Cassidy-Kaine’s proposal involves huge and risky financial manipulation with minimal gains.
It is also important to try to create a whole new trust fund to shift Congress’ focus to the actual restoration of the balance between social security income and gains. The aging of the population leads to an increase in the cost of benefits, but the payroll tax remains fixed. In the short term, assets in trust funds bridge this gap. According to the latest Social Security Trustee Report, assets in the pension fund are expected to run out in 2033, after which the program can pay 77% of promised benefits.
The real solution requires closing the gap between income and benefits. Social Security Actuaries publish a booklet every year, listing more than 150 different options. Some obvious steps in income include a slight increase in payroll tax rates, raising the tax payroll base to about $300,000 (about 90% of the earnings), and possibly health insurance in the payroll tax base. At the same time, the fact that high-income earners can be compensated for longer lifespans than their low-wage peers can be made up for the fact that they have lived longer than their low-wage peers, thus making the plan more progressive and thus gaining more from the plan. It will take about an hour to put together the viable compromises, which will take people seriously.
On top of that, Cassidy-Kaine’s proposal calls for the creation of a new trust fund with borrowed money – though in good faith – that could cause serious harm.
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