When is America’s entire political class going to apologize to the rest of us for plunging the Social Security program into crisis?
Shouldn’t we make them do that before they spend the next election — and the next several after that — claiming that they’re the ones who know how to fix it?
I’m not just talking about Democrats or Republicans, “stupid liberals” or “mean conservatives.” I’m talking about the whole sorry bunch of them, from the wacko lefties to the wacko righties and everyone in between. Don’t be fooled by the finger pointing or the partisan circus. This is a massive, bipartisan $22 trillion disaster. It’s a crisis that could have been easily avoided, and should have been. They have no excuse.
Instead, within about a decade, we’re looking at 20% cuts in benefits, or a 7% hike in taxes, or some combination of both. And politicians have the sheer chutzpah to blame the rest of us — for wanting too many benefits, or paying too little in taxes, or even for not having enough children.
I am waiting for some of them to start complaining that “we” are living too long.
Social Security is heading for the rocks mainly because the trust fund is mismanaged. Everybody in Washington knows the fund is mismanaged. They have known it for years. Decades. And yet they did nothing.
They did nothing.
This would be like the people on the bridge of the Titanic actually seeing the iceberg from miles and miles away — and still smashing straight into it.
Any idiot knows how to run a pension fund. It’s not complicated. You invest most of the money in stocks, because that’s where you make the big bucks over time. And you invest the rest in boring, stable, low-return assets like bonds, cash and maybe gold, to give the whole thing a bit of ballast and smooth out returns. That’s it.
The standard pension fund is invested 60% in stocks (and other risk assets, like real estate and venture capital) and 40% in ballast — typically bonds. There’s nothing magic about that particular ratio. It has simply emerged as the most popular model. Some invest 70% in risk assets, some 80%. Warren Buffett, who knows a thing or two about sensible investing, has told his successors to invest 90% of his estate in stocks, via the S&P 500
and 10% in Treasury bills.
But the principle is the same, and it’s simple: You put most of your money in investments that generate good returns over time. This is how pretty much every pension fund in America — and around the world — does it, from those run by states, cities and towns, to those run by teachers’, cops’ and firefighters’ pension plans, to those run by companies and unions. It’s how every financial planner advises us to manage our 401(k) plans.
It’s simple and it works — which is why everyone does it.
Everyone? Er, not quite. Not Social Security.
These geniuses invest every single nickel of the fund in ballast: miserable, low-risk, low-earning Treasury bonds.
Investments in things like stock that might actually make us some money? Zero. Nuthin’.
This is the result of an act of Congress that has never been amended. And the fault lies with Congress, not the Social Security Administration, which is legally required to follow this insane policy. It has been an unmitigated disaster.
You can see the wreckage by looking at the details on the Social Security Administration’s own website. Since 1940, the hard-earned dollars that Americans have been forced to pay into the trust fund have earned an average annual return of just over 5%. Before inflation.
You can see the numbers here.
The S&P 500 during the same period? Just over 12%.
If you think that’s about two and half times as much, think again. That’s about two and a half times as much per year. Compounded over time, the gap is enormous.
Over, say, 40 years, that adds up to a 1,300% difference.
Even a fund invested conservatively — 60% stocks, 40% bonds — would have earned 8.6% a year on average.
Over 40 years, that adds up to a nearly 300% difference.
Quick calculations using Social Security financial data show that if they’d moved to a 60/40 portfolio as recently as 1988, today the fund would have twice as much money as it actually does — an extra $3 trillion and change.
Hmmm. Don’t you think that would be kind of useful just about now?
A trillion here and a trillion there, and soon you’re talking about real money.
Nearly 20 years ago, President George W. Bush did try to change things, sort of. But his proposal to invest some Social Security dollars in the stock market was part of a broader, flawed plan to create separate, privately owned accounts. Democrats fought the idea — but they did not counter by suggesting that the trust fund itself invest in stocks.
Now it’s probably too late. “Unfortunately, that ship has long sailed,” says Charles Blahous, a senior strategist at George Mason University’s Mercatus Center and a veteran expert on Social Security reform. “The opportunity for that kind of reform to do any good has long passed.”
Social Security now runs an annual deficit, spending more money on benefits than it takes in through payroll taxes, he points out. The surpluses of the 1990s and 2000s are a distant memory. “In other words,” he says, “there’s nothing to invest anymore.”
Alicia Munnell and Michael Wicklein at Boston College’s Center for Retirement Research pretty much agree.
So why raise the issue now?
(OK, so this is hardly the first time I’ve raised it.)
There’s a simple reason. It is essential context for the coming explosive debate over Social Security “reform.” We’re going to be fighting about this issue for the next 10 years, at least. Politicians are already ramping up their rhetoric on the topic.
Some say the system is in crisis because the rich are doing too darn well. Others say it’s because retirees are doing too darn well. We’re going to be hearing this more and more.
And so I thought I’d just remind you all that the No. 1 reason is that the politicians themselves screwed up the trust fund.
No ifs, ands or buts.
Not that they’ll ever be held accountable. Have you noticed that? Nobody in the establishment is ever brought to account. Not when they are invading the wrong country, blowing up the financial system, bungling the response to a pandemic or bankrupting the country’s pension plan.
Instead it’s just, “let’s move on … mistakes were made … lessons have been learned.” Once it’s clear the establishment has screwed up yet again, everyone is like baseball player Mark McGwire, testifying about steroids in front of Congress. They’re not here to talk about the past.
Welcome to the USNA — the United States of No Accountability.
Social Security’s crisis is no accident, either. This was done with malice aforethought. We know that, because the alibis are so preposterous.
These people claim it would be too “risky” to invest the plan in stocks. As if Uncle Sam, by far the richest institution in the history of the world, was somehow unable to handle the “risks” that the rest of us handle in our 401(k) plans.
As for risk — what are they suggesting might happen? The trust fund could go bankrupt and we’d have to cut benefits? That’s what’s happening under their “no risk” strategy.
Then there’s the claim that Social Security couldn’t invest in stocks because it has to “pick” stocks. As if Jack Bogle and Vanguard didn’t invent the stock index fund in the 1970s.
How stupid do these people think we are?
So what are the real reasons these people let Social Security slide into disaster?
It’s simple: Politicians of all stripes loved all that free money. Every two weeks, every hardworking schmuck in America was required to hand over $1 out of every $8 they earned to a fund that was required by law to lend it, at a low rate of interest, to Uncle Sam.
This paid for Ronald Reagan’s deficits, George W. Bush’s, Barack Obama’s, Donald Trump’s and now Joe Biden’s. Only George H.W. Bush (sort of) and Bill Clinton (more seriously, with Newt Gingrich) stopped stealing from the workers by cutting deficits.
And there’s another, simpler reason why our political masters didn’t fix Social Security: They didn’t care. None of these people are going to depend on the program for their own retirement. Higher payroll taxes? Lower benefits? It’s no skin off their nose.