The Social Security Funding Crunch Is Looming. Current Proposals from Congress Aren’t Cutting It.

In June, Social Security’s Board of Trustees released its annual report on the financial status of the program, revealing that Social Security is in trouble.

The report projects that the fund that supports millions in retirement will be exhausted in 2033, which, without intervention, will lead to an automatic benefit cut of at least 20 percent. This means millions of seniors thrust into poverty and an uncertain future for working people  planning their retirement today.

To make matters worse, in July the Republican Congress and President Donald Trump passed their budget bill, which only accelerates this timeline. The legislation erodes the amount of taxable income subject to payroll taxes. With fewer dollars coming in, the fund is now expected to be depleted in 2032, with benefits expected to be cut by a full 24 percent. President Trump has repeatedly said he will not cut Social Security, yet his administration has done just that.

Some members of Congress are putting forward proposals to address Social Security’s long-term funding problem. Sen. Tim Kaine (D-VA) and Sen. Bill Cassidy (R-LA) released a plan calling for the US Treasury to borrow $1.5 trillion, invest the money in stocks for 75 years, and use the proceeds to fund Social Security benefits.

Unfortunately, this proposal doesn’t cut it and glosses over multiple thorny policy questions.

First, how should the US Treasury fill the gap between promised benefits and Social Security payroll taxes in the short run?

Even in the rosiest scenario where stock returns are high, the big returns to investing in stocks only accrue in the long run. The proposal acknowledges this, noting that the US Treasury would have to fill the current gap between Social Security revenue and outlays with other funds.

Yet the Kaine/Cassidy proposal is silent as to how the Treasury should fill this current gap in funding: Should we raise the payroll tax rate? Should we perhaps look beyond payroll taxes and introduce a special estate tax? Without a funding source, Congress is likely to resort to borrowing funds to close the gap—a route made even less attractive by the deficit-ballooning nature of Trump’s budget bill.

Simply put, the proposal doesn’t even attempt to solve the problem we have now.

Second, should the government invest in stocks at all?

Proposals for the government to invest in the stock market come in many forms, from Trump’s February executive order to plan for a Sovereign Wealth Fund to a social wealth fund intended to distribute capital income to lower- and middle-income households. In most cases, the benefits from this kind of fund stem from a higher expected return from stocks than the rate at which the government borrows. In theory, the federal government is well equipped to absorb the risks of holding stocks for the long term, so high-risk, high-return investments could help avoid the need to raise taxes.

Yet, while stock returns have historically been high, there is no guarantee that this will continue. US stocks experienced negative real returns for over a decade in the 1970s, and modest stock returns are the norm in much of the rest of the world. And with rising technological competition from China, there is a real prospect that US companies will no longer see such exceptional earnings growth as they have in the past few decades, making this proposal substantially riskier.

Finally, say that we have agreed that the government should invest in stocks. Why should Social Security be the program that bears the risks of the market?

While the government could invest in equities, if it did, why would we want Social Security benefits to depend on the stock market? If the return from the investment dipped, it’s wishful thinking to assume that voters would actually tolerate a cut to benefits, putting the Treasury on the hook for filling the gap anyway.

There frankly isn’t a good reason to tie Social Security to stock market returns—other than the fact that the program is facing a shortfall, and politicians who are reluctant to raise taxes are hoping for an easy fix.

Despite the alarms about this problem, it is not insurmountable. Policymakers can and should address the funding shortfall with straightforward increases to revenue, rather than benefit cuts or financial gimmicks. Solutions like raising the cap on taxable income for high-income earners or stricter rules on classifying pass-through income that is subject to payroll taxes can go a long way toward addressing the funding gap.

What we need now are politicians willing to defend and fight for this vital program today, rather than kicking the can a generation down the road and hoping for the best.