The latest annual report from the Social Security Board of Trustees has revealed that the Social Security program that supports millions of vulnerable individuals across the country will soon be faced with major trouble if Congress does not intervene soon. According to the report, the Old Age and Survivors Insurance (OASI) trust fund — which is used to pay benefits to retirees and survivors — will be depleted by 2033 and following this, the program’s remaining revenue will only be able to cover 77% of scheduled benefits going forward.
Whilst the report added that the Disability insurance (DI) trust fund would continue to pay 100% of scheduled benefits until 2099, if the two funds were combined into the OASDI trust fund, it would only be able to pay 100% of all scheduled payments up until 2034 — a year earlier than the estimates of the previous year’s report. At this point, the remaining revenue would only cover 81% of scheduled payments going forward.
In pursuit of preventing this shortfall, Senator Bill Cassidy and Senator Tim Kaine have now brought forward a potential solution.
New plan to save Social Security
In an op-ed piece written for The Washington Post, Sen. Cassidy and Sen. Kaine have proposed that the trust fund investments be diversified. “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,” they wrote.
Achieving this may be easier said than done, however, as a $1.5 trillion upfront investment would be required to set this proposal in motion.
“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 senators explained.
“There is a nationwide appetite to implement a bipartisan, commonsense plan like ours,” the pair asserted in their op-ed.
Senator Cassidy explains the proposed solution
At present, the Social Security trust funds are invested in low-yielding Treasury bonds. Sen. Cassidy explained that shifting away from low-yield investments and establishing a new fund could essentially guarantee that the Social Security program is saved from a shortfall — as per a Friday interview on CNBC’s Squawk Box,
Sen. Cassidy stated that, “We are losing money on those treasuries right now. What we propose is a separate fund from the Social Security trust fund, in which we would put $1.5 trillion into it over 10 years, invest it in the U.S. economy, hold it in escrow for 65 to 75 years and then use that return to offset any unfunded accrued liability in the Social Security trust fund.”
He then went on to highlight that this proposal would be successful regardless of the state of the economy, further citing the importance of having sufficent funds for full benefits in the program.
“We modeled this through the Great Financial Crisis, and the Great Financial Crisis, of course it dips down, but within a year, it’s back up to where it was,” Sen. Cassidy added. “The power of our economy is so great….Even if it only offsets 60 percent of our unfunded accrued liability, that’s a lot better than we’re doing now.”
This proposed solution to the potential shortfall of a program that millions are reliant on is yet to be officially submitted for congressional approval. However, Sen. Kaine and Sen. Cassidy have also stated delaying action could result in “difficult and preventable consequences.”
“In theory, it makes sense. But theory needs to be backed by modeling—especially worst-case scenarios. We should compare the potential downside of investing in equities with the worst-case outcome under the current system, where the trust fund is invested in Treasuries,” Kevin Thompson, the CEO of 9i Capital Group and the host of the 9innings podcast, shared with Newsweek. “Right now, Treasuries are yielding more than they have in years, meaning the risk-free rate of return has increased. So, any shift to riskier assets like equities would need to deliver even higher returns to justify the added risk.”