You might think that the current banking turmoil has no impact whatsoever on Social Security. However, the difficulties that several banks have experienced could affect the federal program in at least one way.
A bipartisan group of U.S. senators has been working on several proposals to preserve Social Security benefits. But one of those potential changes could be doomed because of the bank crisis.
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Bipartisan brainstorming
Sen. Bill Cassidy (R-La.) and Sen. Angus King (I-Maine), who caucuses with Democrats, lead a group of U.S. senators from both sides of the political aisle that has reportedly been meeting informally for months. This group has one overriding focus: brainstorming ideas to protect Social Security benefits. The program's trust funds will run out of money by 2035 based on the 2022 report from the Social Security trustees. The Congressional Budget Office, however, projects that insolvency could come even sooner.
The bipartisan group has come up with several alternatives to preserve Social Security. One option is to gradually raise the full retirement age from 67 to around 70. A similar approach was taken in the past with the retirement age raised from 65 to 67 over a period of time.
Another potential approach the senators have identified is to revise the benefits formula used to calculate Social Security benefits. Sen. Cassidy and Sen. King released a joint statement earlier this month that said "there are dozens of considerations being weighed to protect Social Security."
Arguably the one idea that has generated the most controversy is the creation of a sovereign wealth fund. This fund would allow the federal government to invest money in stocks to fund Social Security retirement benefits. The rationale for this approach is that the stock market can generate higher returns over the long term than investing in Treasury bonds, which is where Social Security trust funds are currently invested.
Enter the bank crisis
Proponents of sovereign wealth funds often rightly point out that other countries use similar approaches to fund their national retirement programs. Norway has the biggest sovereign wealth fund.
Guess where Norway's sovereign wealth fund invested some of its money? In bonds issued by Silicon Valley Bank, which recently failed. Silicon Valley Bank's parent company, SVB Financial Group, is now seeking to reorganize under Chapter 11 bankruptcy laws.
On March 13, 2023, a spokesperson for Norway's sovereign wealth fund told Reuters, "We expect to get some money back on our credit exposure, but it is premature to say how much." The sovereign wealth fund also owned shares of SVB Financial Group, which have plunged as a result of the banking crisis.
The situation could have been even worse. Norway's sovereign wealth fund significantly reduced its position in Credit Suisse earlier this year. Shares of the Swiss bank have plummeted 70% over the past three weeks after identifying "material weaknesses" in its fiscal 2021 and 2022 financial reporting controls.
Second thoughts
Reuters reported last week that concerns about an escalation of the bank crisis "could give lawmakers second thoughts about investing Social Security funds in stocks." Norway's experience will almost certainly fuel those doubts.
Could the bipartisan group of senators even decide not to propose a sovereign wealth fund for Social Security? That's not out of the question in the aftermath of the problems besetting the banking industry and their impact on Norway's sovereign wealth fund.
However, the senators know that something must be done to prevent Social Security from going insolvent not too far down the road. As Sen. Cassidy and Sen. King stated in their press release, "Taking action is our only option; inaction now will only make it harder later." If the idea of a sovereign wealth fund to help protect Social Security is doomed because of the bank crisis, other ideas will be required.
