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In a recent Washington Post article [ [link removed] ], Senators Bill Cassidy and Tim Kaine deserve praise for recognizing a problem that many of their colleagues still deny: the significant gap between future scheduled Social Security spending growth and the revenues available to fund those increases. The Senators then propose that additional borrowing could help close this gap if the government invested the borrowed money in stocks and other assets.
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Unfortunately, there is no free lunch. Some people must accept a reduction in the scheduled growth rate of Social Security benefits, and others must pay higher taxes to keep the system sustainable. There’s no other alternative. If Congress wants more people to share in the higher returns from riskier assets, it could encourage more private retirement savings, which I have long supported as a supplement to Social Security. However, that’s also not free; someone has to pay for those investments.
The Basic Argument
The core argument of the proposal is that the government can benefit from financial leverage. It can borrow at the interest rate on government debt and invest the funds in riskier assets with higher returns, particularly stocks. Suppose the average difference between the stock market return and the government borrowing rate is 5 percent in real terms. To keep things simple, assume the government puts those private assets into a sovereign or Social Security wealth fund. Then, after 75 years, so the argument goes, the $1.5 trillion would grow to an expected value of $58 trillion, after paying the interest costs.
In many ways, the Cassidy-Kaine idea of generating stock market-like returns is similar to several past proposals for Social Security reform. In those earlier versions, the Social Security trust fund was larger, and the government would either finance the stock purchases by selling Treasury securities from that fund or invest fewer incoming Social Security taxes in government bonds. However, those trust fund actions still required more borrowing from the private sector, just as this latest proposal does.
Turning this trick into a Social Security issue only causes confusion. Social Security doesn't need to be involved. Congress could decide to borrow for any purpose and invest in the stock market. For example, it could authorize the Federal Reserve, the trustees of Medicare, or the Department of Housing and Urban Development to do so.
Magic money?
If there is no additional economic growth from this government portfolio adjustment—that is, no increase in overall output and income in the economy—these actions redistribute existing income and risk within the economy. The money must come from somewhere. If the government takes in more money, it leaves the private sector with less. When the government buys stock, someone else sells it. As these government purchases increase the demand for stock ownership, stock prices likely go up (more than they would have), but the earnings-to-price ratio drops. Future stock buyers are among those who face those lower returns. Also, this new borrowing could flood the market further, making government bonds riskier. That could lead to the government bearing more costs through higher interest rates.
No matter how these factors play out, there’s still no magic money.
Suppose there is some magic money.
Still, assume there's some magic money. The next question is why anyone would want to spend it this way. Current law schedules Social Security and Medicare to grow indefinitely at rates higher than economic growth. How much effort should be devoted to maintaining this trajectory? Even with magic money, Congress must prioritize. Why not allocate more to non-elderly households with and without children, who are now more likely to be poorer than older households?
In my recent book, Abandoned: How Republicans and Democrats Have Deserted The Working Class, The Young, And The American Dream [ [link removed] ], I argue that three Santas offering free spending increases, tax cuts, and low borrowing costs have been promising this magic for almost fifty years and bear significant responsibility not only for our massive debt buildup but also for a substantial decline in the relative support for the working class and the young. Choices have consequences.
Encouraging yet more profligacy?
Yet other problems relate to the government deciding on which stocks to buy, and Allison Schrager’s [ [link removed] ]concerns about the government investing in today’s risky market.
Magic money gives Congress the idea that it doesn’t need to pay for its actions. The resulting increase in debt threatens the economy, while the belief that money grows on trees or in Fort Knox vaults distracts our elected officials from their job of finding better ways to collect and spend revenues.
I don’t mean to criticize this particular proposal. The days of reckoning are upon us. It’s simply time to stop relying on Santa to save us from facing the consequences directly.
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