Study finds leveraged stock market proposal unlikely to resolve US Social Security shortfall

A report by the Center for Retirement Research has concluded that a proposal to borrow heavily and invest Social Security funds in the stock market is unlikely to resolve the program’s projected financial shortfall. The study, which examined a plan introduced by US Senators Bill Cassidy and Tim Kaine, found that the strategy risks saddling future taxpayers with significant debt due to market volatility and the higher risk profile of equities compared to Treasury securities.

The proposal involves an initial borrowing of $1.5 trillion to create an investment fund, with total borrowing potentially reaching $26.6 trillion over 75 years. This approach differs from standard trust fund management, which relies on existing payroll tax revenues, by leveraging borrowed funds to chase higher returns. The appeal of the plan lies in the historical outperformance of stocks over government bonds, which could theoretically reduce the need for future tax hikes or benefit cuts.

However, the Center for Retirement Research simulations indicate that even under optimistic assumptions of a 6.5 per cent real annual return, the plan would fully repay its borrowing only 40 per cent of the time. Anqi Chen, senior research economist and co-author of the report, noted that while equities historically outperform Treasury securities, the leverage required to make a dent in the shortfall introduces unacceptable risk. Under less optimistic return assumptions, the outcome worsens considerably, leaving the government with large amounts of debt and hefty interest payments.

Max Richtman, president and CEO of the National Committee to Preserve Social Security and Medicare, echoed these concerns. He stated that financial markets are unlikely to generate the profits needed to repay the loans, creating a double burden of debt repayment and benefit obligations. The report also highlighted risks including political interference and the possibility that government ownership stakes could become large enough to affect market stability.

Researchers suggest that investing in equities may only be viable if Congress first implements immediate tax increases or benefit cuts to close the long-run financing gap. Chen indicated that if the trust fund were rebuilt through such measures, allocating 40 per cent of the assets to equities could reduce the need for future adjustments. However, she warned that time is running out, noting that waiting until the trust fund faces insolvency in 2034 would likely render the strategy ineffective as a permanent fix.