Social Security had another disastrous fiscal year in 2022, even as it headed toward bankruptcy.
America’s main pension plan badly outperformed fast-moving markets, competitors, and even inflation, thanks to a rigid investment policy nonetheless hasn’t changed since 1935, The trust fund earned just 2.5% on every dollar invested last year, tthat the trustees just disclosed, This was compared to a spectacular year in the financial markets, where the S&P 500 index SPX,
International stocks rose 11%, real estate trusts rose 32% and commodities rose 26%.
Nearly all American workers are forced by law to pay 12.4% of every dollar earned to a Social Security trust fund, yet last year their money earned just a quarter of the returns of a typical global pension plan, and total Only one-sixth of the amount. They would have earned in a basic Vanguard Balanced Index fund. VBIX,
The fund’s return was also less than half the rate of inflation, meaning that in fact, workers lost 4% of their money in terms of purchasing power.
Social Security investments have underperformed the basic pension fund benchmark in 4 out of the past 5 years, 8 out of 10, 11 out of the past 13, and two-thirds of all years since 1980. The average underperformance during the last 4 decades has been around 4.5% per annum.
Under the terms of the 1935 law that created it, the plan is required to invest 100% of its funds in U.S. Treasury bonds. Almost no other pension plan in the world works this way. The rest invest mostly in more profitable stocks, real estate and other assets. The typical American pension plan, in addition to Social Security, lasts approx. 80% of its money in stocks and alternative investments such as commodities, real estate and hedge funds, and less than a quarter of any type of bond – which includes not only safe treasuries but also things like corporate bonds, which are riskier but yield high returns.
The unique Treasury-only policy was set by the Social Security Act of 1935. Stocks were out of fashion at the time: America was still reeling from the aftermath of the great Wall Street crash of 1929–1932, when US stocks fell nearly 90%. ,
President Franklin Roosevelt had another reason to put the new program money in U.S. government bonds: It provided easy money to help pay for the New Deal. But the policy has proved disastrously expensive for the trust fund and the workers who rely on it. Since the mid-1930s, US stocks have outperformed Treasury bonds by more than 6,000% overall, In addition to Social Security, the average large American pension plan today is expected to earn an average return of about 7% per year. Last month Social Security was investing all new FICA taxes in bonds paying 1.5% interest.
Social Security’s disastrous investment returns come in the form of funding crises and potential bankruptcy. In 2022 the trustees reported that holes in the fund’s accounts had grown to $3 trillion in the previous 12 months, the largest annual increase on record. Social Security is now down to a level of $20 trillion, or nearly 100% of US GDP. Unless drastic action is taken, benefits will have to be cut by about a fifth across the board starting in a decade.
Such drastic action is expected to include tax hikes and profit cuts. The last time this happened, in the 1980s, the government responded by adding Social Security beneficiaries to benefit taxes for the first time.
If the trust fund had been invested in a regular mix of stocks and bonds throughout its history, like every other pension plan, there would have been no funding crisis. About 65 million Americans currently receive Social Security benefits. Most are retired employees, although they also include widows, orphans and the disabled. Another 175 million Americans currently pay into the system.
Despite the impending crisis in Social Security, many of its underlying principles are currently subject to little political debate. For example, there is little or no political pressure to change its investment strategy formed in 1935, even though it has proved disastrous and no other comparable pension plan follows such a strategy. Equally, there is little demand to end the system whereby Social Security is financed by a flat, even regressive, 12.4% income tax — even among those who Otherwise everyone considers flat taxes obnoxious. (The tax ends roughly on income over $143,000.)
The result is that someone with the minimum wage must hand over $1 out of every $8 to an investment operation that is designed by law to make them lose money. And no one peeps – not even those who repeatedly complain about how hard it is to put body and soul together on minimum wage.
If Social Security goes bankrupt, both liberals and conservatives in politics can be expected to try to turn the crisis to their advantage. As someone once said, you never want to let a crisis go to waste. Meanwhile some people from the political class will be personally affected when the crisis strikes. For those tied to the Beltway economy, their wealth, federal salaries, outside income, and inexhaustible contacts mean future Social Security cuts, even 20% or more, will barely register.