Inside the Cassidy-Kaine Plan’s Risky Investment That Has Economists Sounding Alarms

There’s a certain type of Washington proposal that usually comes with a sharp-sounding name, bipartisan fanfare, and the silent hope that no one will look at the math. Senators Tim Kaine and Bill Cassidy’s “Big Idea” definitely fits that description. For a few years now, it has been making the rounds in one form or another. It has received endorsements here, dubious white papers there, and most recently, a high-profile endorsement from Larry Fink of BlackRock in his yearly chairman’s letter to investors. The politeness barrier surrounding the plan appears to have finally been broken by that endorsement. After months of skirting the issue, retirement economists began speaking more sharply. The term “risky” began to surface in headlines. And a longer reckoning came this week.

Once the rhetoric is stripped away, the mechanics are shocking. The federal government would borrow about $1.5 trillion over the following ten years. The borrowed funds would be invested in stocks and other “appreciable assets,” placed in a new Social Security trust fund, and allowed to compound for 75 years. The Treasury would need to borrow an extra $25 trillion to make up for Social Security’s yearly benefit shortfalls during that same period. Theoretically, the investment fund would have grown to a size that would allow it to repay the initial $1.5 trillion with interest and leave a tiny surplus at the end of the 75-year runway. A small portion of the much larger borrowing is expected to be offset by that surplus.

The most outspoken public critic has been Alicia Munnell, a longtime MarketWatch columnist and senior advisor at Boston College’s Center for Retirement Research. In a letter dated April 9, she referred to the scheme as a “flight of fancy.” Her argument is straightforward: the plans that the Cassidy-Kaine proposal contrasts with, such as the Railroad Retirement Investment Trust, the Ontario Teachers’ Plan, and the Canada Pension Plan, all use tax money or employee contributions to finance their investments. not borrowed funds. The increased anticipated returns on stocks are not a free lunch because the Cassidy-Kaine fund would be fully financed by new federal debt. They serve as payment for the risk. In this instance, the taxpayer would bear the risk for 75 years.

In late March, the Committee for a Responsible Federal Budget ran the numbers with even less tact. According to their analysis, the plan functions more like a sovereign debt fund than a sovereign wealth fund because it is funded primarily by new borrowing rather than new revenue. They estimated that the strategy could increase the national debt by up to $170 trillion over the course of 75 years, adjusted for inflation. The debt-to-GDP ratio may increase by at least 140 percentage points. The federal government would start to own a sizable portion of private American businesses, which raises additional governance issues. Additionally, Social Security’s distinguishing characteristic—that it is a self-financed, contributory program—would essentially end.

After running a Monte Carlo simulation on the math, Andrew Biggs of the American Enterprise Institute was not impressed for a different reason. It wasn’t even money that was his main objection. It was that if the Big Idea were to be implemented, it would probably postpone by 75 years the significant reforms that Social Security truly requires, which would involve a combination of small revenue increases and carefully considered benefit adjustments. A generation of politicians would be able to claim to have solved the issue. Most of them would be dead by the time anyone could confirm that the math had been correct. Designing around that type of accountability is challenging. Biggs gently but clearly points out that the stock market isn’t the true risk. The human one, that is.

The way this plan has been received is telling. It makes sense that Larry Fink would support it; BlackRock oversees a sizable portion of global equity assets, and a $1.5 trillion investment in stocks wouldn’t exactly harm the asset management sector. Although no other ingredients have been made public, Senator Kaine hedged a little during a hearing on March 25 by referring to the fund as one “ingredient” in a larger solvency package. In an opinion piece published in the Washington Post in July of last year, Senator Cassidy presented the plan as a means of saving Social Security without increasing taxes or reducing benefits. You can see why the political pitch is effective. It enables legislators to assure younger voters that their payments won’t increase and older voters that their checks are secure. Who wouldn’t want to hear that?

The issue is that there is no mystery surrounding Social Security’s funding issue. It has been recognized for many years. The base of payroll taxes is too limited. The top income growth has outpaced the cap on taxable earnings. Benefits for high earners compound as people live longer. The Mirrlees-style solutions, which include expanding the tax base, slightly raising the tax rate, reducing high-end benefits, and possibly taxing some health benefits as the CRR has modeled, aren’t particularly glamorous. These make sense financially but are uncomfortable politically. In contrast, the Cassidy-Kaine plan requests that the nation borrow $1.5 trillion on the premise that the S&P 500 will save us in the year 2100.

It’s difficult to avoid thinking of the plan as something more than its specifics. It’s an example of how legislative bodies have evolved to handle long-standing budgetary issues through innovative financial engineering as opposed to the awkward politics of tax and benefit reform. It’s unclear if the Big Idea will ever pass committee. It’s another matter entirely whether it ought to. At the end of her piece, Munnell speculated that Cassidy and Kaine are merely attempting to persuade their colleagues to take action because they know better. That might be the most optimistic reading out there. Perhaps Washington simply wants to think that the stock market will take care of this for us. It takes a long time to realize we were mistaken—seventy-five years.