What does the $ 20 trillion Social Security crisis mean to the average American?
It means you are going to be poorer in retirement than you should be, because the program will have to slash your benefits by as much as 25%.
Or it means working Americans’ taxes are going to have to go up, by about four full percentage points, to bail out the system.
Or it means big, big cuts in federal projects like national security, scientific research, highways, and so on, to balance the books.
Or, most likely, it means some mixture of the above.
So you may be interested to hear that this unmitigated national disaster could have been avoided, and quite easily, if people in positions of authority hadn’t just lied and lied and lied and lied and lied.
And lied.
And a new paper from Boston College’s Center for Retirement Studies offers yet more proof.
Yes, Social Security’s trust fund could have been invested all along in high-earning stocks as well as low-earning Treasury bonds, confirms the Center’s Alicia Munnell—a MarketWatch contributor—and colleague Michael Wicklein.
Yes, that would have transformed the program’s finances and avoided most or all of the current crisis.
And no, the objections raised by the naysayers to stop this from happening never held water, they add.
“The notion of governments investing in equities through retirement program trust funds is a viable concept that has been proven feasible, safe, and effective in both Canada and the United States,” Munnell and Wicklein report. “So, in theory, this idea could work with the U.S. Social Security program.”
But the twist in the knife is that today, when political opinion is at last waking up to the obvious case for holding stocks in Social Security, it may already be too late, they add.
“The prerequisite for such activity is a trust fund with significant assets to invest,” Munnell and Wicklein point out. “The current trust fund is rapidly heading to zero…Social Security no longer has a sizable trust fund to invest.”
Uh oh.
As Munnell and Wicklein point out, since the 1920s the S&P 500 SPX, -0.29% has produced an average annual return of 9.6% a year. U.S. Treasury bonds, by contrast, have earned just 4.6%.
What does that mean? Over 30 years, $ 1 invested at 9.6% a year grows to more than $ 15. Or more than four times as much as the same $ 1 invested at 4.6%.
Four times as much.
Yet Social Security has been invested 100% in Treasury bonds for its entire existence.
Good news for the federal government, politicians, and their clients. This has given Uncle Sam access to a huge, secure and effectively secret pool of tax money to spend.
The only losers? Social Security savers.
There have been attempts to change this disastrous investment strategy. Especially in the wake of the Greenspan Commission in the early 1980s, which “rescued” Social Security by raising taxes and cutting benefits—and left all the money in Treasurys, where it could help finance Ronald Reagan’s budget deficits.
This included proposals in the 1990s, when Bill Clinton was president, and in the 2000s, when George W. Bush was. In the latter case, Bush wanted to allow Social Security to invest in stocks only as part of a complex program to “partially privatize” the program and create individual accounts. Democrats responded, not by embracing equities while rejecting the private accounts, but by opposing any changes at all.
The case for including stocks in the Social Security portfolio back then was so obvious that even total idiots could make the case, and did.
From the establishment? Silence.
Munnell and Wicklein note that the Canadian Pension Fund changed its strategy in the 1990s and started investing partly in stocks. The result? Success. Higher returns, more assets, better funding.
And they note that the U.S. Railroad Retirement System made the same move, also in the 1990s. Result? The same.
And they point out that the Federal Thrift Plan has been investing in stocks since the 1980s. Result? The same. Once again, higher returns, more assets, and better funding.
They don’t mention, but could have done, that other public, government-run pension funds around America and around the world include stocks alongside bonds in their portfolios, and the results are also great success.
This includes U.S. state and local pension funds, the Norwegian sovereign-wealth fund, and many others.
Nor do they mention the obvious point, namely that the same people who have fought to keep Social Security out of stocks keep large chunks of their own retirement savings in stocks.
“Equities for me, but not for thee,” as one might say.
If politicians think stocks are too “risky” for America’s pension plan, we might ask why they haven’t reformed ERISA, the 1974 law governing pensions and retirement plans, to keep all pensions and retirement accounts away from the terrible stock market (which marches relentlessly higher).
Probably the most surreal objection to letting Social Security invest in the stock market is the claim that this would politicize the stock market and give politicians power to pick the stocks of companies they liked.
It is now almost 50 years since Vanguard’s Jack Bogle invented the index fund, which doesn’t pick stocks but instead invests passively, mechanistically, in all the stocks in the market. Wall Street and Main Street are fully aware of this concept, which is now used for hundreds of billions of dollars of U.S. stock market investments. The State Street SPDR S&P 500 ETF Trust SPY, -0.25% alone has more than $ 400 billion in assets. The index fund has been around about three times as long as the iPhone. It’s been around longer than Pac-Man. It’s been around longer than Star Wars.
Yet the Washington establishment still blithely pretend it doesn’t exist.
In other words, they lie.
Never mind. You can just pay higher taxes now and get fewer benefits in retirement. How’s that sound?