Lawmakers have long known that Social Security faces a day of reckoning but have dodged any reforms that would cut benefits, hike taxes, or do both.
The dilemma gained more urgency when new projections this month showed that the Social Security trust fund will run out of money sooner than previously thought, meaning benefits would face a 22% cut by 2032 unless adjustments are enacted.
For years, revenue from payroll taxes has been insufficient to fund current benefits, and the trust fund covered the gap. But once it runs out, Social Security will only be able to distribute what comes in.
A proposal by Senators Bill Cassidy, R-La., and Tim Kaine, D-Va., would maintain current benefits and continue avoiding any pain for recipients or taxpayers by instead relying on the stock market—along with a mountain of fresh debt.
Their idea is for the federal government to borrow $1.5 trillion for an investment fund that would be loaded with stocks and other risk assets, which would accumulate gains for 75 years and offer better returns than Treasury bonds would.
At the same time, Cassidy-Kaine plan would require another $25.1 trillion in borrowing to cover the gap between Social Security’s revenue and benefits during those 75 years. The idea is to use returns from the investment fund to pay down the $26.6 trillion in new total borrowing.
Easy peasy, right?
In fact, Boston College’s Center for Retirement Research ran some simulations and found that the senators’ plan is unlikely to work.
The Cassidy-Kaine proposal assumes nominal stock returns of 8.9% a year, in line with past performance. Accounting for inflation, real returns would be about 6.5%.
Applying that number annually over 75 years results in the investment fund growing to $30.6 billion, more than enough to pay back what would be borrowed, according to Boston College.
“After incorporating the volatility in equity returns, however, the results show that the gamble does not always pay off,” authors Anqi Chen, Alicia Munnell, Jean-Pierre Aubry wrote in a report last month.
Even assuming 6.5%, the range of simulations showed investment returns would fail to cover the additional debt about 64% of the time.
Meanwhile, top Wall Street firms have projected future stock market gains will fall short of historical averages. And using less bullish assumptions produces grimmer outcomes for Social Security. For example, simulations that apply a 4% yearly real return on stocks result in the investment fund failing to pay off debt 83% of the time.
Returns could be even lower because loading up on that much debt would affect interest rates and the stock market, the report pointed out. Total debt is $39 trillion, and publicly held debt is already 100% of GDP.
“As a result, the most likely outcome is that in the 75th year, the government will end up with a big pile of debt, requiring large interest payments,” the authors said.
But 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—avoiding even steeper taxes or cuts in the future.
Trump accounts
Looking to the stock market to rescue Social Security isn’t a new idea. President Bill Clinton considered it during the 1990s, when stocks were riding the dot-com boom.
Meanwhile, Sen. Ted Cruz, R-Texas, suggested last month that so-called Trump accounts for American children are part of an effort to revamp Social Security.
Last year’s One Big Beautiful Bill Act created allowed parents and other authorized individuals to open tax-advantaged savings accounts for any child under 18 with a Social Security number.
During a panel discussion at the Milken Institute’s Global Summit, Cruz said U.S. conservatives have been trying to mimic Australia’s superannuation program, which requires employers to pay into an employee’s investment fund to be accessed upon retirement as a way to reduce reliance on public pensions.
“Here’s the dirty little secret: Trump accounts are Social Security personal accounts,” he said.
Cruz added that as parents see their kids’ Trump accounts surge, they will become more open to changing how their own payroll taxes are spent.
“Wouldn’t you like to be able to keep a portion of your tax payments that you’re paying already, and instead of sending it to Uncle Sam, wouldn’t you like to have a Trump account just like your kid does?” he explained. “And my prediction is within five years, that is going to have a really compelling constituency because people will have seen it, and that is I think powerful and transformational.”
But Social Security benefits are funded by workers currently paying payroll taxes, meaning diverting today’s tax payments would affect today’s retirees. Cruz didn’t address how Social Security would be funded if workers pay into Trump account instead of payroll taxes.
For now, Trump accounts will likely become a ubiquitous workplace benefit, just like 401k accounts, with employers matching employees’ contributions, Cruz predicted.
“Relatively speaking, it’s a pretty inexpensive employee benefit,” he said. “But the benefit over time is massive.”
