Cassidy-Kaine proposes borrowing new trust funds is a bad idea – Center for Retirement Research
It also shifts Congress' attention to actually fixing Social Security.
Sen. Bill Cassidy (R-LA) resurrected his proposal — this time with co-author Sen. Tim Kaine (D-VA) to create a trust fund and use borrowed funds to invest in stocks and other high-yielding assets to solve Social Security financing problems. It's great to see senators taking some initiative to address the financing of Social Security, but in these polarized times it would be great to see a bipartisan effort and some equity investment in any Social Security trust fund, and Cassidy-Kaine's proposal is not a good idea. It introduces new risks into the funding structure and avoids addressing fundamental imbalances in the program.
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 that are expected to earn higher returns than Treasury bonds. The new trust will be allowed to remain unchanged for the next 75 years. During that time, the federal government will borrow additional amounts to cover Social Security's annual shortfall. At the end of the accumulation period, the Trust Fund will repay the Treasury principal and interest on the original borrowed amount. Any remaining proceeds – due to the difference between the Treasury's interest rate and the expected rate of return on the venture – could 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 Railroad Retirement Investment Trust, which owns a diversified portfolio of assets to ensure benefits are paid to railroad workers. If equity investing is an issue, one could also point to the successful investment policies of the Canada Pension Plan and the Ontario Teachers' Pension Plan.
The problem with these comparisons is that these other plans don't rely on borrowing money. Instead, the money comes from tax revenue or employee contributions, which is then invested in stocks and bonds. As a result, all accumulated reserves are available to pay promised benefits. By contrast, in the Cassidy-Kaine proposal, the only benefit that would support Social Security is the expected difference between Treasury bond rates and stock returns. The higher expected returns on stocks only make up for the risk taxpayers will bear. In short, Cassidy-Kaine's proposal involves huge and risky financial manipulation for very little gain.
Equally important, trying to create an entirely new trust fund shifts Congressional attention to actually restoring the balance between Social Security income and benefits. The aging of the population causes benefit costs to rise, but payroll taxes remain fixed. In the short term, assets in trust funds bridge this gap. According to the latest Social Security Trustees report, assets in the retirement fund are expected to be depleted by 2033, after which the plan can pay 77% of promised benefits.
Real solutions require closing the gap between income and benefits. The Social Security Actuary publishes a booklet each year that lists more than 150 different options. Some obvious steps on the revenue side include a slight increase in the payroll tax rate, raising the taxable payroll base to about $300,000 (about 90% of earnings), and potentially including health insurance in the payroll tax base. At the same time, the scheme could be made more progressive by slightly reducing benefits for higher earners to compensate for the fact that they live longer than their lower-wage counterparts, thereby getting more out of the scheme. It would take a serious person about an hour to put together a workable compromise.
On top of that, Cassidy-Kaine's proposal to create a new trust fund with borrowed money – while well-intentioned – could cause serious harm.
