The future of Social Security is a topic that has long been a source of concern for policymakers and the public alike. With the trust fund projected to run out of money sooner than expected, the need for reform is becoming increasingly urgent. One proposed solution is a plan by Senators Bill Cassidy and Tim Kaine that relies on the stock market and a significant amount of new debt to maintain current benefits. However, as the Boston College Center for Retirement Research has found, this plan is unlikely to work as intended.
The Cassidy-Kaine proposal assumes an annual stock return of 8.9%, which is in line with historical performance. However, accounting for inflation, the real return would be around 6.5%. Over 75 years, this would result in the investment fund growing to $30.6 billion, which is more than enough to pay back the borrowed amount. But the report also highlights the volatility of equity returns, and even with a 6.5% return, the investment fund would fail to cover the additional debt about 64% of the time.
This is a significant concern, given that the total debt in the U.S. is already $39 trillion, and publicly held debt is 100% of GDP. Loading up on this much debt could have a negative impact on interest rates and the stock market, potentially leading to lower returns than expected. The report concludes that the most likely outcome is that the government will end up with a large pile of debt, requiring large interest payments.
Despite these concerns, the Boston College report still sees potential for stocks in reforming Social Security. Using tax hikes or equivalent benefit cuts to shore up the trust fund and allocating 40% of it to stocks would keep it solvent indefinitely in most simulations. This approach would avoid even steeper taxes or cuts in the future, which is a more sustainable and reliable solution.
The idea of using the stock market to rescue Social Security is not new. President Bill Clinton considered it during the 1990s, when stocks were riding the dot-com boom. Sen. Ted Cruz has also suggested that so-called Trump accounts for American children are part of an effort to revamp Social Security. However, these proposals have not yet been implemented, and the future of Social Security remains uncertain.
In conclusion, while the Cassidy-Kaine plan may seem like a quick fix, it is a risky and uncertain solution that could have negative consequences. A more sustainable approach would be to use tax hikes or equivalent benefit cuts to shore up the trust fund and allocate a portion of it to stocks. This would ensure that Social Security remains solvent and reliable for future generations.
