Funding for the Social Security program has become something of a growing issue in recent years and the latest annual report from the Social Security Board of Trustees has confirmed this. According to the report, the Old Age and Survivors Insurance trust fund is projected to be depleted by 2033, less than a decade from now.
This is a major trust fund, and whilst it is not the sole source of revenue for the program, if it does become insolvent as per the report’s estimates, millions of beneficiaries will likely see a massive cut to their benefit amounts in the near future.
If there is no immediate intervention from Congress with regards to this projected shortfall, beneficiaries could be looking at benefit cuts of up to 23%. As a result, in a message to the public, the Board of Trustees has urged lawmakers to take action.
In response to the report, a pair of senators have now come forward with a proposal to create a new investment fund that can be used to fund the Social Security program, thereby saving it from going insolvent. Here is what has been proposed.
Social Security Board of Trustees annual report
The Social Security program is funded primarily through means of a dedicated payroll tax to which workers contribute a percentage of their earnings. Supplementing this source of revenue, however, are two major trust funds: the Old Age and Survivors Insurance (OASI) trust fund, and the Disability Insurance (DI) trust fund.
If nothing is changed now, the OASI fund will be depleted by 2033 and as a result, the remaining revenue would only be sufficient to cover 77% of scheduled benefits.
If both trust funds were combined into one OASDI trust fund, however, it would only be able to cover 100% of scheduled benefits until 2034. Following this, the remaining revenue would only cover 81% of all scheduled benefits.
Investment fund proposal
Writing in an op-ed piece for The Washington Post, Senator Bill Cassidy (R-LA) and Senator Tim Kaine (D-VA) have come forward with a proposal to create a new investment fund for Social Security. In theory, the investment fund could yield higher returns enabling the Social Security program to steer clear from insolvency.
“That’s why we’re working on a bipartisan proposal for a new investment fund that would infuse much-needed money into Social Security, while ensuring no one on Social Security or nearing retirement sees any change to the benefits whatsoever,” the pair of Senators wrote.
“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.”
The proposal requires an upfront investment of $1.5 trillion from the Treasury which would then be invested in a broad portfolio to start the fund. This fund would be given a growth period of 75 years, with the U.S Treasury Department providing Social Security benefits in the interim. Once the 75 years are up, the Treasury would be repaid from the fund, and payroll taxes would also be supplemented from the fund.
Economists and policy analysts specializing in Social Security were not especially impressed by the proposal, however.
“Unfortunately, their proposal does not improve the program’s finances because it avoids imposing the tax increases or benefit reductions that are necessary to keep it solvent,” stated Sita Nataraj Slavov, a nonresident senior fellow at the American Enterprise Institute.
Additionally, Gopi Shah Goda, the director of the retirement security project at Brookings, noted that, “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.”