There are different types of risks. Some you might have to take, like surgery to address an acute problem. Any time you go under anesthetic and are the target of sharp blades and invasive tactics, there’s a chance you won’t wake to see the results.
The U.S. faces a situation like this. The Federal Old-Age and Survivors Insurance Trust Fund — the ultimate financial backing for Social Security — is running out of money and time. Two senators, one Republican and one Democratic, have suggested an approach that might work. But this is one of those risky scenarios.
Social Security’s Problems
Social Security has immense problems. Fundamentally, people misunderstand it. The program was never personal savings accounts for retirement. From its onset in 1935, people working began to pay a tax that was used to cover the benefits for those receiving them. If it had shifted even immediately to a pay-ahead-and-save system, the first people who could have received Social Security payments after the initial eligible group would have had to wait until the 1970s to collect.
It is more like a form of insurance for autos or health or homes, where people pay premiums. That money and the total investments from those sums create the large amounts of capital needed to pay claims.
Social Security has been stymied. It is burning through reserves. At the current rate, that money will be exhausted, triggering an automatic benefit cut of 23%. There are two main reasons why the program is in such dire straits.
Rising income inequality, particularly between 1983 and 2000, saw the best-paid 6% of wage earners enjoy a 62% income increase in inflation-adjusted terms. A large portion of those gains were above the maximum taxable level. The other 94% saw only a 17% increase, and it was taxable. In other words, people at the top 6% of earners pay a much smaller percentage of their incomes into the system than everyone else, and the percentage of lower-paid incomes was a more significant dent in what they had to spend. If that hadn’t happened, the current gap wouldn’t exist.
The other factor is how the Federal Reserve lowered interest rates in the wake of the Great Recession and kept them there for many years. Any insurance company invests its funds to generate more revenue and meet future obligations. Social Security is restricted by law to buying Treasury bills, notes, and bonds. The returns were too low to help boost the funds.
Sovereign Wealth Fund For Social Security
Last month, Senators Bill Cassidy, M.D. (R-LA) and Tim Kaine (D-VA) suggested an interesting alternative plan: a U.S. sovereign wealth fund that would boost the returns on Social Security investments. According to them, the more recent Social Security Trustees Report shows that over the next 75 years, payroll tax revenues would fall $25 trillion short of what is needed.
Instead of cutting benefits or thrashing about, the federal government would put $1.5 trillion of investment into the fund and give it 75 years to build, putting money into an escrow fund. Dividends would be put back into the investment fund. Cassidy told The Hill that the money wouldn’t add to the national debt because money could come out of the escrow account to pay the Treasury bonds needed for the initial funding. (Typically, money runs the other way, with Social Security buying Treasurys and being repaid by the Treasury.)
On a temporary basis, the Treasury would provide Social Security benefits. After 75 years, Social Security would pay the Treasury back. Supplementary payroll taxes would help fill the gap in the future. The $1.5 trillion would be put in over five years at $300 billion a year. Now for the risks.
Bail-Out Fund Risks
Financial risks are part of the concern. What happens if the fund isn’t managed intelligently? That doesn’t have to be the case; large pension funds can run for decades and longer. It requires discipline and expertise. Many people in the country have a distrust of civil servants; however, civil servants with deep understanding of finance and investing are exactly the type of people who would be necessary. Swapping people out every few years would be extremely disruptive.
Investments by the United States on this scale, if it happened today, would immediately be the largest sovereign wealth fund in the world, slightly larger than the Norway Government Pension Fund Global, which currently is the top such fund, according to Economics Insider. That has the ability to shift markets and distort global economics.
More important is the possibility that administrations would want to direct investments in political ways, whether to encourage a specific sector, drive votes in an election, or reward a contributor or company.
Current moves by the Trump administration, like firing the commissioner of the Bureau of Labor Statistics and the IRS commissioner, may not be political moves. And yet there is no way to know for certain. The uncertainty is enough to cause problems. The U.S., and the rest of the planet, is already seeing the dynamic with the dismissal of Bureau of Labor Statistics Commissioner Erika McEntarfer by Trump, who didn’t like the July jobs numbers, calling them “rigged.”
“Policymakers use BLS statistics to guide decisions about government actions, and everyone else may use them to judge whether politicians have succeeded in managing the economy well,” wrote University of Notre Dame Associate Professor Thomas Stapleford, who teaches in the school’s department of history. (Many businesses, institutions, and others also depend on the BLS statistics.)
“Of course, all of these uses depend on Americans being able to trust the numbers,” Stapleford added.
If trust over data is difficult to obtain and maintain, imagine the discussion if more than a trillion dollars were at question.
Then again, doing nothing would be far riskier.