Expert Warns a ‘Risky’ Social Security Plan Could Have Unintended Effects

Without Social Security benefits, a stress-free retirement would not be attainable for many older Americans today. A 2024 AARP survey found that 20% of Americans 50 and over have no retirement savings. People in that boat typically need Social Security to make ends meet.

But Social Security is facing the possibility of benefit cuts as early as 2032. That’s when the program’s Old-Age and Survivors Insurance Trust Fund, which pays retirement benefits, is projected to run out of money, according to the Congressional Budget Office.

One proposal seeks to pump money into Social Security and prevent benefit cuts, but it’s not without risk – and the reward may also be limited.

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Borrowing and investing to save Social Security

Social Security clearly needs a lifeline to avoid benefit cuts. Senators Bill Cassidy and Tim Kaine have proposed a solution — a $1.5 trillion investment fund separate from the Social Security trust funds to be invested in stocks, bonds, and other investments, similar to how retirement plans and pensions are typically invested. The money would then be held in escrow for 75 years, enabling it to grow.

The U.S. Treasury Department would be responsible for making payments to Social Security recipients for those 75 years. From there, the Treasury Department would get repaid.

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Some say it’s a good idea

Because Social Security’s OASI fund is invested entirely in safe, interest-bearing U.S. Treasury securities, its returns have been limited through the years and will continue to be limited. Proponents of Cassidy and Kaine’s plan argue that higher returns could help close Social Security’s long-term funding gap.

Fans of the proposal have also pointed to the success of the Railroad Retirement Investment Trust, plus major public pension systems in Canada, as proof that equity investments can strengthen retirement programs, despite the risks involved.

BlackRock CEO Larry Fink, meanwhile, believes that investing Social Security’s funds more aggressively could be a smart move. In his annual shareholder letter, he suggested investing a portion of that money in a similar manner to other long-term pension plans.

“This would not mean privatizing Social Security or putting it all into the stock market,” Fink said. “It would mean introducing a measure of diversification, similar in principle to the federal Thrift Savings Plan, which manages retirement savings for millions of federal employees.”

Critics warn it’s a risky move with limited upside

On the other hand, not everyone is a fan of the aforementioned proposal. Alicia Munnell of the Center for Retirement Research at Boston College argues that borrowing funds for Social Security is risky. After all, it involves investing in assets whose returns are not guaranteed.

Plus, she argues, comparable programs like the Railroad Retirement Investment Trust and Canada Pension Plan fund their financial investments with tax revenue or worker contributions — not borrowed money.

Munnell says the aforementioned proposal would add $1.5 trillion to the national debt, piling onto an existing burden. She thinks a better idea is to put together a proposal that allows Social Security to generate more revenue. However, she also says Social Security may need to reduce payments to certain beneficiaries to get on better financial footing.

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What the debate means for Social Security recipients

Social Security is facing cuts in the near term, which is a problem for the millions of seniors who rely on those benefits today. The fact of the matter is that lawmakers need to do something to prevent those cuts from happening so that countless seniors don’t risk plunging into poverty.

One proposal to help stave off Social Security cuts is to raise or eliminate the wage cap, which limits the amount of earnings that are taxed to fund the program each year. The Senior Citizens League reports that 77% of seniors support eliminating the wage cap.

Recently, a $100,000 yearly benefit cap for couples was introduced as another potential solution to prevent Social Security cuts. That change could potentially close one-fifth of Social Security’s solvency gap, reports the Committee for a Responsible Federal Budget.

Policymakers have also proposed raising Social Security’s full retirement age. This could keep workers in the labor force longer, allowing the program to take in more revenue over time. But this idea also presents a challenge for those who may not be physically able to work longer than planned.

Bottom line

Social Security plays an important role in many people’s retirement plans. While it’s too soon to assume that benefit cuts are inevitable, preventing them clearly poses its share of challenges.

As such, the best thing for workers today to do is prepare for Social Security cuts even if they end up being avoidable. As is it, workers are advised to build savings to supplement their monthly checks. Those who “oversave” will have that much more money available to spend in retirement if they end up collecting their Social Security benefits in full.

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