Social Security had another disastrous fiscal year in 2022, even though it is urgent against insolvency.
America’s most important retirement plan saw its investments poorly follow the booming markets, competitors and even inflation, once again thanks to a rigid investment policy that has not been changed since 1935. The trust fund earned only 2.5% on every dollar invested last year, the has just revealed. That compared to a fantastic year in the financial markets where the S&P 500 index
rose 29%, international equities 11%, real estate funds 32% and commodities 26%.
Nearly all U.S. workers are required by law to pay 12.4% of every dollar they earn to the Social Security Trust Fund, but last year their money earned only a quarter of the returns of a typical global pension scheme, and only a sixth of what they would have earned in a basic Vanguard Balanced Index Fund.
The fund’s return was also less than half the inflation rate, which means that workers in real purchasing power parity lost 4% of their money.
Social Security’s investments have outperformed the Basic Pension Fund benchmarks in 4 of the last 5 years, 8 of the last 10, 11 of the last 13 and in two thirds of all years since 1980. The average underperformance over the last 4 decades has been about 4.5% per year.
The plan is committed to investing 100% of its money in U.S. government bonds under the terms of the 1935 law that created it. Almost no other pension scheme in the world works like this. The rest invest mostly in more profitable stocks, real estate and other assets. The typical US pension scheme, with the exception of Social Security, continues 80% of its money in stocks and alternative investments such as commodities, real estate and hedge fundsand less than a quarter in bonds of all kinds – including not only safe government bonds, but also things like corporate bonds, which are more risky but offer higher returns.
The unique treasury policy was set by the Social Security Act of 1935. At the time, stocks were out of fashion: the United States was still on the wane after the Great Wall Street crash of 1929-1932, when U.S. stocks fell about 90%.
President Franklin Roosevelt had another reason to keep the new program’s money in U.S. government bonds: It provided easy money to pay for the New Deal. But the policy has proven to be catastrophically costly for the trust fund and the workers who depend on it. Since the mid-1930s, Overall, US equities have outperformed government bonds by more than 6,000%. The average large US pension scheme, excluding Social Security, today expects to earn an average return of around 7% per year. Last month, Social Security invested all new FICA taxes in bonds with a 1.5% interest rate.
Social Security’s catastrophic return on investment comes as the fund prepares for crisis and possible insolvency. By 2022, administrators reported that the hole in the fund’s accounts had grown by $ 3 trillion in the previous 12 months, the largest annual increase ever. Social security is now underfunded to the $ 20 trillion level, or nearly 100% of U.S. gross domestic product. Unless drastic measures are taken, the benefits will have to be cut by about a fifth across the board from a decade onwards.
Such a drastic action is expected to include tax increases and benefit reductions. The last time this happened, in the 1980s, the government responded by overthrowing social security beneficiaries with benefit taxes for the first time.
If the trust fund had been invested in a regular mix of equities and bonds throughout its history, like any other pension scheme, there would be no financing crisis. About 65 million Americans currently receive Social Security benefits. Most are retired workers, although they also include widows, orphans and the disabled. Another 175 million Americans are currently paying into the system.
Despite the looming crisis in social security, many of its underlying principles are currently the subject of little political debate. There are e.g. little or no political pressure to change its investment strategy, made in 1935, even though it has demonstrably been disastrous, and no other comparable pension plan follows such a strategy. Likewise, there seems to be little demand for ending the system, where social security is funded by a flat, even regressive, 12.4% income tax – even among people who otherwise consider all fixed taxes to be unpleasant. (The tax limits income above about $ 143,000.)
The result is that a person with the minimum wage has to hand over $ 1 out of every $ 8 that they earn for an investment operation designed by law to lose them money. And no one says beep – not even those who often complain about how difficult it is to keep body and soul together on the minimum wage.
If social security hits insolvency, both liberals and conservatives in politics can be expected to try to turn the crisis in their favor. As someone once said, you will never let a crisis go to waste. Meanwhile, few of them in the political class will be personally affected when the crisis comes. For those connected to the Beltway economy, their wealth, federal wages, outside income and matchless contacts mean that a future social security cut, even of 20% or more, will hardly be recorded.