Experts point out big problems with Social Security fix

Everyone agrees that Social Security is facing financial trouble. Unfortunately, no one agrees on how to fix that situation. In fact, one recent bipartisan proposal has drawn criticism from experts at the Center for Retirement Research. 

Here are some details on the proposed fix, along with why experts believe it’s not the right approach to help shore up the benefits that retirees count on for their financial security in their later years. 

This proposed Social Security fix is getting a lot of attention

One Social Security solution getting a lot of attention lately is a proposal put forth by Senators Bill Cassidy (R-LA) and Tim Kaine (D-VA). Under this proposal, the federal government would borrow $1.5 trillion over the next decade to finance a new trust fund for Social Security, since the current trust fund is expected to run dry as early as 2032. 

The borrowed money would be invested in equities and would grow for 75 years, while the federal government temporarily borrows $25 trillion to cover the annual shortfalls in Social Security benefits that will occur in 2032 when the current trust fund runs out. After the 75-year investment period has come to an end, the new financed trust fund would repay the treasury both the $1.5 trillion used to seed the new trust fund and the additional $25 trillion that was used to pay benefits. 

The proposal’s authors point to the success of the Railroad Retirement Investment Trust, which is invested in equities and which pays a pension to railroad workers. And  BlackRock chairman Larry Fink recently endorsed the proposal, which has received a lot of renewed attention because of it.

Experts say this Social Security fix is a bad idea

While the idea of investing to finance Social Security may seem to make sense in theory, not everyone is on board with it. In fact, the Center for Retirement Research recently published an article from one of its senior advisors highlighting the flaws in the plan. The CRR expert does not mince words, explaining that “the idea does virtually nothing to solve Social Security’s financial problems.”

Unfortunately, as the CRR points out, the only new money that is coming in to provide support for Social Security is coming from borrowed funds from the Treasury. While the hope is that the investments would produce generous returns to enable repayment, the reality is that this is a very high-risk strategy for obvious reasons. There is a very real chance that the expected returns would not materialize.

Under this proposal, taxpayers would be borrowing to make a huge risky investment in hopes that returns produced enough to repay all that was borrowed. And Social Security wouldn’t be made more financially stable over the long-term because of it, so the bet would have very little payoff. Social Security would remain ultimately financially insolvent, other than the borrowed funds, with no long-term fix.

Social Security is supposed to be self-funded by contributions from current workers and taxes collected on benefits. The fact is that it’s not, because the population is aging, fewer younger people are paying in as the birth rate falls, and older people are relying on benefits for more years because they live longer. Borrowing isn’t going to solve this, as more structural changes likely need to be made sooner rather than later.