A Republican Senator Has a Social Security Fix That's Unlike Anything Else on the Table

Most lawmakers agree Social Security needs fixing, but they remain divided over who should pay for it. Bill Cassidy believes the answer is neither higher taxes nor lower benefits.

Instead, his proposal would have the government borrow $1.5 trillion and invest it for decades, hoping the returns are enough to strengthen Social Security. It is an approach unlike anything else on the table and one worth understanding if Social Security is part of your retirement plan.

How Cassidy's $1.5 trillion plan would work

Today, Social Security keeps its reserves in U.S. Treasury securities, which provide steady but relatively modest returns.

Cassidy's proposal would create a separate fund, financed entirely by new federal borrowing, and invest that money in stocks and other assets that have historically earned more than government bonds.

The investments would stay in place for about 75 years, giving them decades to grow. During that time, Social Security would continue paying benefits as it does today.

And once the investment fund reached the end of its 75-year life, the money would be used to repay the original borrowing and help cover Social Security's long-term funding gap.

What the plan is counting on

Bill Cassidy's proposal depends on the investment fund earning more than it costs the government to borrow the money. The bigger that gap, the more money is available to help Social Security.

In one calculation, the Center for Retirement Research estimates the fund could grow to about $30.6 trillion over 75 years. That would be enough to repay the $1.5 trillion the government borrowed while still leaving money to help support Social Security.

That outcome depends on returns coming close to the market's historical average. Many economists are less confident about that, especially because stock prices are already high and future economic growth may be slower than it was in the past.

What happened when similar ideas were tried

Bill Cassidy is not the first policymaker to suggest borrowing money and investing it in the hope of earning higher returns. Several states have tried a similar strategy by issuing pension obligation bonds, borrowing at government interest rates, and investing the money to help close pension funding gaps.

Illinois, for instance, borrowed billions of dollars for its pension system in the 2000s, but investment returns later fell below borrowing costs, leaving the state's finances in a weaker position.

Cassidy argues his proposal has a stronger track record behind it, pointing to the Railroad Retirement Investment Trust. The fund has produced strong long-term returns since 2001 by investing payroll tax revenue that had already been collected.

His proposal would invest borrowed money, making repayment part of the equation from the very beginning.

Why researchers are cautious about the odds

Boston College's Center for Retirement Research ran thousands of simulations to see how often Cassidy's fund would generate enough returns to cover its costs.

When it assumed relatively strong long-term investment returns, the plan worked about 36% of the time. In nearly two-thirds of the simulations, the investment fund fell short, leaving the remaining cost to be covered elsewhere.

Using lower investment returns, closer to what many economists expect today, the odds fell even further. In those simulations, the fund covered only about 19% of the borrowing on average.

Researchers at the American Enterprise Institute reached a similar conclusion, estimating the plan has roughly a 30% chance of paying for itself.

What could make the plan fall short

A small miss in expected returns can become much larger over 75 years. If the fund earns less than projected, there may not be enough money to repay the borrowing and support Social Security at the same time.

The cost of borrowing could also work against the plan. Some economists believe taking on $1.5 trillion in new debt could push government borrowing costs higher, forcing the investment fund to earn stronger returns before Social Security sees any real benefit.

Cassidy's proposal has a large potential payoff, but it leaves the outcome tied to market performance over a very long period.

What this would change for retirees and what it wouldn't

All of that uncertainty would take years to play out, so current retirees would not see an immediate change in their monthly checks. Social Security benefits would continue under the current system while the investment fund had time to grow.

The proposal is aimed at what happens after the retirement trust fund is projected to run short of reserves in 2032. If the investments perform as Cassidy expects, they could help prevent the automatic benefit cuts scheduled under current law. If they don't, Congress could still face a funding gap, leaving lawmakers to look for another solution.

Bottom line

Bill Cassidy is asking Congress to solve Social Security in a way no other proposal does. The potential reward is easy to see, but the outcome depends on decades of investment returns that no one can predict with certainty.

While Congress works through its options, keeping your finances flexible enough to absorb whatever lawmakers eventually decide can help keep you on track for retirement, even if the final solution looks very different from the proposals on the table today.