Social Security had another disastrous fiscal year in 2022, even as it rages towards insolvency.
America’s top retirement plan has seen its investments lag badly behind booming markets, competitors and even inflation, again thanks to a rigid investment policy that hasn’t changed since 1935. The trust fund earned just 2.5% on every dollar invested last year, the trustees have just revealed. That compares to a great year in financial markets, where the S&P 500 index
were up 29%, international equities 11%, real estate trusts 32% and commodities 26%.
Nearly all U.S. workers are required by law to put 12.4% of every dollar they earn into the Social Security fund, but last year their money earned just a quarter of the return of a typical global retirement plan, 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 rate of inflation, meaning workers in purchasing power lost 4% of their money in real terms.
Social Security investments have underperformed basic pension fund benchmarks in 4 of the last 5 years, 8 of the last 10, 11 of the last 13 and two-thirds of all years since 1980. about 4.5% per year.
The plan is required to invest 100% of its money in US Treasury bonds, under the terms of the 1935 law that created it. Hardly any other pension scheme in the world works like this. The rest usually invest in more profitable stocks, real estate and other assets. The typical American retirement plan, other than Social Security, remains about 80% of its money in stocks and alternative investments such as commodities, real estate and hedge funds, and less than a quarter in bonds of any kind — including not only safe government bonds, but also things like corporate bonds, which are riskier but yield higher returns.
The unique Treasury-only policy was defined by the Social Security Act of 1935. At the time, stocks were out of fashion: the US was still reeling from the aftershocks of the great Wall Street crash of 1929-1932, when US stocks were about 90 percent fell. %.
President Franklin Roosevelt had another reason to keep the money from the new program in US Treasuries: It easily provided money to help pay for the New Deal. But the policy has proved disastrously expensive for the trust fund and the employees who rely on it. Since the mid-thirties, US equities outperformed government bonds by more than 6,000% overall. The average major U.S. retirement plan, excluding Social Security, now expects an average return of about 7% per year. Last month, Social Security invested all new FICA taxes in bonds bearing 1.5% interest.
Social Security’s disastrous investment returns come as the fund braces for a crisis and potential insolvency. In 2022, the trustees reported that the gap in the fund’s accounts had grown $3 trillion in the past 12 months, its largest annual increase ever. Social Security is now underfunded to the level of $20 trillion, or nearly 100% of the US gross domestic product. If drastic measures are not taken, benefits will have to be cut by about a fifth across the board from the age of ten.
Such drastic measures are expected to include tax increases and benefit cuts. The last time this happened, in the 1980s, the government responded by taxing Social Security beneficiaries with benefits for the first time.
If the trust fund had been invested in a regular mix of stocks and bonds throughout its history, like any other retirement plan, there wouldn’t have been a funding crisis. About 65 million Americans currently receive Social Security benefits. Most are retired workers, but also widows, orphans and the disabled. An additional 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. For example, there is little or no political pressure to change the investment strategy created in 1935, although it has arguably been disastrous and no other comparable retirement plan pursues such a strategy. Likewise, there seems to be little demand for an end to the system where Social Security is funded by a flat, even regressive, 12.4% income tax — even among people who might otherwise find all the flat taxes distasteful. (The tax is capped on incomes above about $143,000.)
As a result, someone on minimum wage has to give $1 of every $8 they earn to an investment operation designed by law to lose them money. And no one says peep, not even those who often complain about how hard it is to keep body and mind together on minimum wage.
If Social Security goes bankrupt, both liberals and conservatives in politics can be expected to try to turn the crisis in their favor. As someone once said, you never want to let a crisis go to waste. Meanwhile, few of those in the political class will be personally affected when the crisis arrives. For those connected to the Beltway economy, their wealth, federal salaries, outside incomes and unparalleled contacts mean that any future cut in Social Security, even 20% or more, will barely be registered.