EDITOR NOTE: Imagine holding a retirement fund that automatically distributes your capital to another retiree who needs it now. In other words, your invested money is gone from the get-go. How will your retirement fund pay you back when it’s your turn to retire? The fund hopes that some young person will invest some capital so that he or she can retire someday. Before that “someday” comes, the retirement fund will hand it over to you since you’re actively retired. Back to reality. If any fund operated in that manner, you’d probably sue them, and they’d likely be forced to close, as it would resemble something of a Ponzi scheme. But you can’t sue or close the Social Security system, because that’s a fund that’s legally enforced; it’s investment coerced. But what if, when you retire, the ranks of the younger employed population thin-out? Then you’ve got a problem. What if inflation eats away at the value of your investment so that the money you “invested” loses a significant portion of its value by the time it pays you back? The outcome will be harsh. Don’t rely solely on Social Security, pensions, or fixed-income. Diversify your wealth. If you’re invested in stocks and bonds, hold some cash as well but certainly protect the purchasing power of all your asset classes by allocating some funds to non-CUSIP gold and silver.
One of the worst performing pension funds in the world last year was yours.
And you probably didn’t even know it.
All that money you’ve poured into the Social Security trust fund over the years earned less than 1% during 2020, the funds’ administrators have revealed.
The S&P 500 index SPX, +1.42% ? Try 18%.
Even a simple balanced fund of U.S. stocks and bonds, such as the Vanguard Balanced Index Fund VBIAX, +1.08%, earned 16%.
And the giant pension and investment fund run by the government of Norway earned 10.9%.
The returns earned by Social Security is the scandal that keeps on taking. The previous year, the Norwegian pension fund gained 20%, the balanced index fund 22%, and the S&P 500 31%.
Your and my Social Security dollars? Just 2.2%.
No, I’m not kidding. So far in 2021 the fund’s returns have been less than the rate of inflation.
Actually, over the past 10 years the returns of the Norwegian fund have outpaced those of our Social Security dollars by more than 400%. That balanced fund has beaten Social Security by nearly 600%.
I come back to this scandal because Congress just spent $86 billion of our money bailing out private sector pension funds on behalf of the Teamsters and other unions, while continuing to do absolutely nothing whatsoever to put Social Security on a stable financial footing.
The current funding hole in Social Security is $16.8 trillion, according to the trustees. That’s equal to 80% of annual U.S. economic output, or just over $50,000 for every person in the country.
It is a sheer outrage—few hyperboles are strong enough—that we are all required by law to invest 12.4% of every dollar we earn into a pension fund that is run like something out of the Marx Brothers movies. (They take 6.2% from our side of the bucket, and 6.2% from the employers’ side of the bucket. It all works out the same.)
And that 242 million Americans are forced to pin their retirement hopes on a system that is being knowingly left in crisis by those in charge.
If the Social Security trust fund were a mutual fund it would be wound down.
If this were a private sector pension fund there would be lawsuits everywhere.
Some people argue that this doesn’t matter, because what matters is the return you, the beneficiary, will get in terms of future payments. But that’s a flawed or shortsighted argument. Social Security cannot continue to pay out good returns while itself earning bad ones.
There is an explanation for this fiasco. Social Security is expressly forbidden by law from investing any of your dollars in the kind of assets that are recommended by every competent financial adviser on the planet and which are trusted by every other pension fund.
Ownership of stocks? Zero percent.
Ownership of real estate? Zero percent.
Ownership of commodities? Zero percent.
The only thing it can own: U.S. Treasury bonds.
Imagine a company pension fund investing all its money in that company’s bonds and you get the picture.
This is an explanation of the terrible returns. But it is not a reason for them, only a rationalization. Social Security’s requirement to invest only in Treasury bonds was set when it was created back in the 1930s, during the bygone era of ticker tapes and MovieTone newsreels.
In the wake of the 1929 crash, many were reluctant to entrust the new entity’s money to the stock market.
And President Roosevelt wanted to use Social Security’s funds to help pay for government deficits.
Neither of these arguments makes any sense today (even if they did then).
Whenever I suggest to people that Social Security be invested in stocks and other assets, they generally clutch their pearls in shock, before offering up various illogical reasons why that would be totally impossible. Among them:
“The stock market is really risky and could collapse!” (Hmmm…then why does everyone else invest in it? And why should stocks be riskier for the U.S. government—the institution best able to weather volatility?)
“The U.S. government would be interfering in the market!” (Errr…you mean apart from the 2.1 million civilians it employs, the 127,000 buildings it owns, the $3.9 trillion it charges every year in taxes and the $4.8 trillion it spends, and so on? Heaven forbid.)
“It would be too political—the government would end up favoring some companies over others!” (You mean, apart from the $500 billion it spends on contracts with select companies every year? Oh, and have these people never heard of index funds, which involve not picking any stocks at all but just investing in each one blindly according to its market value? The Vanguard Total Stock Market Index Fund VTSAX, +1.61%, which does what the name implies, has been around for 30 years.)
It’s funny how the Norwegians manage to invest $1.3 trillion of their money in global assets—nearly $1 trillion of it in stocks—while the institution that created the atomic bomb and put a man on the moon finds it just too darn hard, and has to go broke instead. Oh well. What can you do?
This sounds academic, but it isn’t. Social Security is in a deep financial crisis. At the current rate, they might have to cut all benefits by 25%, starting in just 10 years’ time, just to balance the books. Or they’ll have to raise your payroll taxes, and cut your benefits less. Or they’ll have to raise payroll taxes a lot. None of this would be necessary if Social Security had owned stocks as well as U.S. Treasury bonds recent decades. None of it. We’d all be living large.
Something to remember next time some politician talks about “unsustainable entitlement spending,” which is another way of saying you’re about to get hosed.
Originally posted on MarketWatch