The latest annual report from the Social Security Board of Trustees has revealed that the projected trust fund shortfall has moved up a year to 2034 when compared to the estimates from the previous year’s report. In a message to the public, the Board of Trustees urged lawmakers to take action and soon to prevent this shortfall from happening.
Now, two senators, Democratic Senator Tim Kaine and Republican Senator Bill Cassidy recently brought forward a proposal that could potentially provide additional funding to the program and subsequently prevent the shortfall from ever occurring, as per the op-ed written by the pair for The Washington Post. Here is what you need to know.
Projected Social Security shortfall
The Old Age and Survivors Insurance (OASI) trust fund and the Disability Insurance (DI) trust fund are both used in conjunction with other sources of revenue to fund the Social Security program which pays benefits to vulnerable Americans on a monthly basis. The OASI trust fund is projected to be exhausted by 2033, less than a decade from now, and at this point, the remaining revenue will only be able to cover 77% of scheduled benefits.
If the OASI and DI trust funds are combined into the OASDI trust fund, it will only be able to pay 100% of scheduled benefits until 2034 before being depelted. FOllowing this, only 81% of scheduled benefits will be covered. However, the report also notes that, “the two funds could not actually be combined unless there were a change in the law, but the combined projection of the two funds is frequently used to indicate the overall status of the Social Security program.”
As such, Senators Tim Kaine and Bill Cassidy have brought forward a proposal that could supplement the program’s funding.
Alternate funding proposal
In the Tuesday op-ed, Senators Kaine and Cassidy wrote the following, “We propose creating an additional investment fund — in parallel to the trust fund, not replacing it — that would be invested in stocks, bonds and other investments that generate a higher rate of return, helping keep the program from running dry.”
A $1.5 trillion up-front investment into the fund would be required to put this proposal into motion, however the senators explained that, “the Treasury would temporarily shoulder the burden of providing benefits to Social Security beneficiaries — but when the new fund’s 75 years are up, it would pay the Treasury back and supplement payroll taxes to help fill the future gap.”
“The trust has remained firmly in the black, with returns even exceeding expectations at some points and with payments consistently remaining reliable and on schedule,” the pair added. “Our proposal is also consistent with virtually every other pension plan — state and private — currently operating in our country, and it matches the strategy most nations use to fund their retirement programs.”
According to Devin Carroll, owner and lead adviser at Carroll Advisory Group who spoke to Newsweek, the proposal is “a smart idea on paper. Stocks usually earn more than government bonds, so adding equities to the mix could ease the need for big tax hikes or cutting benefits. But there’s a trade-off. More return means more risk, and it raises questions about how involved the government might get in the private markets.”
Additionally, Gopi Shah Goda, senior fellow for economic studies and director of the Retirement Security Project at the Brookings Institution is of the opinion that despite addressing the financial shortfall, the proposal does not aim at “structural imbalances”.
“The program can be made more progressive by slightly reducing benefit growth rates for higher-income retirees, many of whom live longer and collect more from the program,” Shah Goda shared with Newsweek. “In addition, increasing the number of working years used to calculate benefits would help reduce the program’s shortfall while also improving incentives to work at older ages.”
“Borrowing funds in the way the proposal suggests would likely raise interest rates and slow growth, and avoids the difficult but important work of modernizing the program so that it continues to provide important protection to seniors in a sustainable manner,” she further noted.
Senators Kaine and Cassidy are yet to formally submit their proposal for Congressional consideration and as such, it remains to be seen what will become of this potential solve for a growing financial crisis.