Can Equity Investments Help Social Security’s Long-Run Financing?
Introduction
Social Security faces a well‑documented financing challenge. The combined Old‑Age, Survivors, and Disability Insurance trust fund is projected to exhaust its assets within the decade, after which incoming revenues can cover only about 80 percent of scheduled benefits. Policymakers from both sides of the aisle have generally been reluctant to raise taxes or cut benefits. Noting the lack of political appetite for tough choices, Senators Bill Cassidy (R- LA) and Tim Kaine (D-VA) proposed a third option – borrowing $1.5 trillion to create a separate fund that would be invested in equities and other risky assets for 75 years. During this period, they assume the federal government would borrow an additional $25.1 trillion to cover Social Security’s annual shortfalls. At the end of the 75 years, their notion is that the proceeds from the new investment fund would be used to repay the Treasury for the initial borrowing and that the remainder could offset the additional borrowing required to cover Social Security’s shortfalls. The key questions are: 1) How much of the 75-year borrowing can the Cassidy-Kaine investment fund offset? and 2) Do more realistic options exist to introduce equities into the financing of Social Security?
Policymakers periodically revisit whether Social Security should invest in equities; under current law, the trust fund only holds Treasury securities. The attraction of equities (or other risky assets) is that they earn a risk premium over Treasuries, which can reduce the need for future tax increases or benefit cuts. At the same time, higher expected returns come with higher volatility and also raise concerns about political interference and market impact. Previous research has shown, however, that strong arms-length governance can minimize political interference and that limited equity investments can improve the program’s finances. Importantly, those assessments were conducted when the program still had significant trust fund reserves that could be invested, so borrowing would not have been required.
This study evaluates the role that equity investments could play in current reform discussions by comparing two approaches: 1) the Cassidy-Kaine proposal to create a separate investment fund with federal borrowing; and 2) introducing equity exposure after restoring solvency and rebuilding reserves. In both cases, the analysis provides a probabilistic range of outcomes based on various assumptions about equity returns. The assessment also includes a welfare analysis to address the contention that people will not like the risk introduced by equities – that is, people will not value the lower taxes in good times as much as they dislike tax hikes in bad times.
