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Social Security will not be able to pay full benefits to beneficiaries past 2034, according to recent government projections. While there’s still time to adjust funding for the program and ensure that it’s solvent for the next generation of retirees, it’s going to require major work and the cooperation of Washington lawmakers who rarely seem to see eye to eye these days.
Little wonder that only 3 percent of Americans ages 30 to 49 are “very confident” in the future of Social Security, according to a 2020 AARP survey.
But a bipartisan idea from legislators to create a separate investment fund could help alleviate some of the funding concerns for Social Security, the social safety net that began paying ongoing monthly benefits in 1940. Here’s how this new potential solution would work.
Lawmakers’ “big idea” for Social Security
Typical solutions to Social Security’s solvency crisis focus on either bringing more money into the system through higher taxes or cutting benefits, through outright cuts or more subtle measures such as increasing the retirement age. Instead, lawmakers are taking a different tack, looking for higher returns from Social Security’s trust fund – what they call a “big idea.”
Traditionally, the Social Security trust fund – where our payroll taxes go every two weeks – has been invested in Treasury bills or cash, which are safe and liquid, but which do not generate significant returns. Since the great financial crisis, Treasury yields have run below the rate of inflation, especially in the recent past, and well below the stock market’s historical returns.
The bipartisan big idea is to create a separate investment fund to participate in the market by investing in stocks or passive index funds. This strategy would allow the fund to accrue returns over an extended period of time, according to the plan’s sponsor, Senator Bill Cassidy, (R-LA), covering about 75 percent of the fund’s 70-year projected shortfall.
At the present, however, Cassidy has no big ideas for funding the remaining 25 percent needed for 100 percent solvency.
This big idea is inspired by something private pension funds have done for years, which is using a market-based investment strategy. Proponents admit the big idea would need a plan B if the market does not provide the required returns necessary. And even Cassidy’s proposed plan would require the Social Security trust fund to have the authority to borrow to pay scheduled benefits, helping to bridge any funding gaps due to a downturn in the market.
Proponents also acknowledge that guardrails need to be in place to ensure that a large influx of funds would not unduly influence the markets.
Downsides to the Social Security “big idea”
Critics of the proposed plan make a variety of points about the plan’s feasibility and whether it’s really a way to fund the plan or just a giveaway to special interests.
Critics point out that administrative costs and investment blunders would overshadow any gains such a program would bring. Furthermore, they say that privatizing Social Security would endanger the livelihoods of many stakeholders and could lead to benefits being slashed if the market underperforms over the long term.
Moreover, even in the short term the setup creates questions. The stock market is notoriously volatile, but Social Security needs a stable source of funds to draw from as it pays out benefits each month. Retirees aren’t just going to wait for their checks until the market performs better.
Plus, it could lead to financial interests looking for further government handouts and increasing the administrative costs of Social Security, one of the most efficient government programs. This step toward privatization could ultimately lead to further steps that undermine the program.
What are the challenges with Social Security?
AARP and other senior advocacy groups have long proposed easier-to-implement solutions to fix the shortfall in Social Security’s trust fund, including those focused on increasing revenue or decreasing benefits.
For example, one solution to address the shortfall involves raising or eliminating the payroll tax income limit. Social Security is funded with a dedicated payroll tax, which is currently 12.4 percent and is split evenly between the employer and the employee. The 2023 payroll tax cap maxes out at earned income of $160,200, meaning that high earners don’t contribute to Social Security for income over the cap. Raising the cap would go a long way to fixing the problem.
In addition to paying a smaller percentage of wages during their working years, these higher wage earners will also eventually draw higher benefits once they do start collecting.
Also contributing to the funding shortfall are fewer workers contributing to the fund. In 1955, more than eight workers supported payments to a single beneficiary. In 2035, the Social Security Administration predicts there will only be 2.3 workers supporting each beneficiary. Lower birth rates and an aging population contribute to a smaller workforce paying Social Security taxes. Those are issues on the funding side of the equation, but there are concerns and potential solutions on the benefits side, too.
Americans’ higher longevity means retirees are collecting their Social Security checks for longer, putting further strain on the trust fund. With retirees able to collect benefits as early as age 62, a Social Security recipient could be receiving benefits for three decades or more.
So some have proposed ways to curb the benefits, including raising the early retirement age or even the full retirement age, now between 66 and 67, depending on your year of birth. Other potential ways to address the payouts include reducing Social Security’s annual cost of living adjustments, helping to curb payout growth over time.
The ultimate solution likely sits somewhere in the middle of all these proposed traditional fixes.
Proponents of the big idea for Social Security think it’s a start on a solution and warn that the window of opportunity to act is closing. In the 2021-2022 legislative session, dozens of bills related to Social Security were introduced, but none made it to a vote. But the longer the delay, the more costly a potential fix is likely to be – and the more likely a reduction in benefits.