Quick hits: Reactions to the Proposal by Senators Cassidy and Kaine to Rescue Social Security

Would the rescue work?

This week, we’re using our Quick Hits series to bring you a collection of perspectives from retirement experts on the recent proposal by Senators Cassidy and Kaine regarding Social Security. The proposal would entail borrowing funds – approximately $1.5 trillion – to invest in stocks, bonds, and other investments, and using the proceeds to pay the funds back to Treasury and supplement existing payroll tax revenue to fund future Social Security benefits.

We've invited three experts on retirement security to provide brief reactions to the proposal: Sita Nataraj Slavov, Professor at George Mason University’s Schar School of Policy and Government and non-resident senior fellow at the American Enterprise Institute; Jason Brown, Visiting Fellow, Retirement Security Project, Brookings Institution; and Gopi Shah Goda, Senior Fellow & Director, Retirement Security Project, Brookings Institution, and Co-Founder of Briefing Book.

Sita Nataraj Slavov: A Sovereign Wealth Fund Would Expose Taxpayers to Risk and Politicize Private Businesses

Senators Bill Cassidy and Tim Kaine deserve praise for drawing public attention to Social Security’s funding shortfall. 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. Instead, the two senators call for the federal government to invest $1.5 trillion in stocks, bonds, and other private securities. Since these investments’ returns have historically exceeded the government’s borrowing costs, the excess amount could be transferred to Social Security. But economists have repeatedly pointed out that these higher returns are not a free lunch; they are compensation for taking on risk. In the event of a stock market crash, or an increase in the interest rate on government debt, taxpayers and Social Security beneficiaries would be on the hook for any required adjustments. Such a scenario is most likely to occur during a time of economic weakness, when these adjustments would be especially painful.

Another important concern is that the Cassidy-Kaine proposal would greatly extend the federal government’s reach into the private sector, distorting and politicizing investment flows and business operations. State government pension funds have a track record of making politically driven investments despite a fiduciary duty to serve their beneficiaries’ interests (similar to the safeguard that’s part of the Cassidy-Kaine proposal). In addition, the federal government has long used federal funding and tax breaks as leverage to influence private entities and incentivize behavior that aligns with its priorities. Policy makers are likely to use a new federal investment fund in the same way. For example, one could easily imagine future Democratic and Republican administrations alternating between requiring federal investment only in companies with diversity, equity, and inclusion (DEI) programs, and prohibiting federal investment in companies with DEI programs. Such policies will in turn influence business decisions. Both Republicans and Democrats should ask themselves whether they trust the other party not to behave this way when it is in power.

Jason Brown: A sovereign wealth fund still will not solve Social Security’s funding shortfall

Senators Cassidy and Kaine’s proposal to create a sovereign wealth fund to fund Social Security benefits is not a new one. The Treasury Department considered the idea nearly 20 years ago in a brief dedicated to options for funding benefits. Treasury takes on the proposition that the government investing in private-sector assets with newly issued debt can generate higher returns for the Social Security Trust Fund to pay for future benefits:

“The higher expected rates of return on risky assets merely compensate for risk that would ultimately be borne by taxpayers. And risky trust fund investments would not increase national saving, so risky assets held in the trust fund would just displace risky assets held in the consolidated portfolio of the private sector (the private sector would hold fewer risky assets and more federal debt). To the extent that risky assets held by the trust fund would earn higher returns, therefore, the resulting gain to taxpayers would be offset by lower returns earned on private-sector assets.”

In other words, any improvements to Social Security’s finances will be offset by losses elsewhere. Treasury goes on to warn that higher returns in the near term—either realized or projected—could delay the real reforms necessary to shore up the program’s finances, pushing the costs of reform to future generations. Moreover, higher returns are not guaranteed, and the additional risk borne by taxpayers could result in lower-than-expected returns, bringing forward a crisis that taxpayers and beneficiaries will have to face.

Gopi Shah Goda: There are no free lunches in Social Security

The plan endorsed by Senators Cassidy and Kane to rescue Social Security involves developing a separate trust fund — sometimes referred to as a sovereign wealth fund — to fund the program. While this proposal makes efforts to address the current financial shortfall by infusing the system with an additional investment fund, it does so in a way that does not tackle the structural imbalances in the program and introduces new risks to the funding structure.

A sensible package of reforms would change the benefit formula to better target assistance, taking care to protect the most vulnerable beneficiaries. 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. 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. There are ways that revenues can also be increased to improve incentives — for instance, adding elements of non-wage compensation to Social Security taxable income. The nonpartisan Congressional Budget Office periodically publishes a report that includes other similar options to address the Social Security funding gap. But 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 can continue to provide important protection to seniors in a sustainable manner.