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The trust funds that Social Security relies on to pay benefits are “rapidly heading towards zero” According to the Center for Retirement Research at Boston University.
Those funds are Usually invested in Treasury billsteeth It is predicted that it will run out in 2034.only 80% of benefits may be paid at that time.
As that day approaches, there is more debate about whether that money should also be invested in stocks.
“Theoretically yes,” said Anki Chen, senior research economist and assistant director of savings research at the recently established Center for Retirement Research. published research Address questions.
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But in the real world, the answer isn’t always so clear-cut, Chen and other experts say.
The problem is whether it will be possible to raise funds for stock investment while paying benefits, given that there is already a shortage of funds.
As the baby boomer generation ages, these benefit obligations are increasing. 10,000 people turning 65 every day.
there were 53 million Social Security recipients in 2010, the year before baby boomers started turning 65, according to the Peter G. Peterson Foundation in New York, which focuses on fiscal and economic challenges facing the United States.
This “big idea” fix depends on stocks
Sen. Bill Cassidy (R-Louisiana) proposed another “big idea” amendment that would call for investing money in stocks instead of the program.
The proposal calls for raising $1.5 trillion and putting it into a separate fund to invest in stocks.
Social Security Trust Fund funds are not included in the plan. Instead, a separate $1.5 trillion investment fund could be financed by borrowing money, raising money from other parts of the budget or selling government assets.
Your investment will be held in escrow for 70 years, allowing your funds to grow.
Your investment will always generate enough income to pay your scheduled benefits.
senator bill cassidy
Republican U.S. senator from Louisiana
Over time, investment funds will earn higher returns than Treasury bills, which range from 1% to 4%, but they won’t beat inflation, Cassidy said at a recent AARP forum on the future of Social Security. He pointed out that there is a possibility.
Ultimately, this strategy could cover 75% of Social Security’s deficit, but it will be up to lawmakers to come up with a strategy to make up the difference.
“We’ll never have to worry about a Social Security deficit again,” Cassidy said at an AARP event. “The investment will always provide enough return to pay the scheduled benefits.”
How do government retirement funds use stocks?
1. Cassidy’s plan draws inspiration from other countries, including Canada.
- According to the Center for Retirement Research, the Canada Pension Plan, which has approximately $570 billion in Canadian dollars, will continue to grow in 1997 in response to the need for increased salary contributions due to longer life expectancy, lower birth rates, and lower real wage growth. changed its investment method. . The plan raised salary contributions and started investing some of the money in stocks. Its portfolio currently includes a variety of investments including stocks, bonds, real estate, infrastructure projects and private equity. The fund invests in Canada and around the world and has delivered a net return of 10% annually over the past 10 years.
2. Certain U.S. programs also include equity-based investments.
- In the 1990s, the American Railroad Retirement System transitioned to investing in stocks after its trust fund grew four times its annual expenses, according to the Center for Retirement Research. The portfolio currently has approximately $27 billion in net assets and includes stocks, real estate, private equity and private debt.
- The Federal Thrift Savings Plan, with approximately $800 billion in assets, was created in 1986 and includes: Passive investing with index funds. Congress would need to approve any proposed investments.
Cassidy spokeswoman Molly Block said financial industry experts who evaluated the plan said return expectations were conservative and the impact on the stock market would be negligible.
Why experts are cautious
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It’s up to Congress to approve changes to Social Security’s investment strategy, but experts question the inevitable risks.
In general, one of the prerequisites for investing Social Security in stocks is having the funds to do so. Chen said trust funds had more money available for investment in the 1990s and 2000s, when the idea was previously discussed.
Tax increases may now be needed not only to make up for Social Security’s current funding shortfall, but also to provide additional funds to invest in stocks.
“Theoretically, yes, it could work,” Chen said. “But it seems very difficult politically.”
Andrew Biggs, a senior fellow at the American Enterprise Institute, said borrowing retirement funds and investing them in stocks, whether in a personal 401(k) plan or a government retirement plan, is a risky move. Point out.
“We’re basically betting on stocks and bonds,” Biggs said. “It’s not wise for individuals to do that, we’re doing it on an economy-wide basis.”
Furthermore, while a 4% or 5% risk premium can make a big difference over a 30-50 year period, there is no guarantee that these conditions will not change along the way, disrupting guaranteed social security. There is a possibility. David Blanchett, Managing Director and Head of Retirement Research at PGIM DC Solutions, said of the government program:
“It’s unrealistic to expect things to stay the same for the foreseeable future,” Blanchett said. “I’m very nervous about the idea of investing my Social Security-type benefits in a stock fund.”
