Could investing in the stock market right the course of Social Security?
A new report from the Center for Retirement Research crunched the numbers. Spoiler alert: probably not.
Social Security reserves are on track to reach a critical tipping point in about seven years. At that time, if no adjustments are made, the benefit program trust fund will be able to pay only 77% of benefits to seniors.
Lawmakers have proposed a number of solutions, including raising payroll taxes, raising the retirement age for younger workers and lifting the Social Security taxable income limit, currently $184,500 in 2026.
The new study examines a less conventional proposal from Louisiana Sen. Bill Cassidy and Virginia Sen. Tim Kaine: have the Social Security Administration borrow heavily and invest the leveraged funds in the stock market.
“It’s a gamble that doesn’t always pay off,” Anqi Chen, senior research economist and co-author of the report, told Yahoo Finance.
The proposal would create an investment fund funded with $1.5 trillion in borrowed funds that would then be invested in stocks. Over 75 years, the government would borrow an additional $25.1 trillion to cover benefit gaps, bringing total borrowing to $26.6 trillion.
The appeal is simple: Stocks historically generate higher returns than the Treasury securities currently held by the Social Security trust fund. Those higher yields could, in theory, reduce the need for future tax increases or benefit cuts.
The flip side, of course, is that stocks are a much riskier investment than government bonds, which are considered risk-free.
The study ran several simulations and found that even if stocks generated a strong 6.5% real annual return over the next 75 years, the Cassidy-Kaine proposal would fully pay off its debt only about 40% of the time.
Under less optimistic yield assumptions, the outcome worsens considerably, leaving the government with large amounts of debt and heavy interest payments for decades.
Researchers say the strategy carries even more risks, including market volatility, political interference and the possibility that government ownership stakes become large enough to affect market stability.
“It’s not that the stock market isn’t going to help,” Chen said. “It’s just that borrowing to invest in the stock market will likely put future taxpayers into debt.”
Social Security watchdogs agree: “One concern with Senator Cassidy’s proposal is that financial markets are unlikely to return the level of profits necessary to repay the loans needed to establish a special Social Security fund,” Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, told Yahoo Finance.