Is Social Security in a crisis?
The arguments in favor of a “yes” answer are widely known, of course. Starting next year, the Social Security Administration will be paying out more in benefits than what is paid into the system. These yearly deficits will gradually eat away at the system’s large current reserves, and those reserves are projected to be completely depleted by 2034. At that point, recipients will only receive around 80 cents per dollar they otherwise would be owed.
Making this already-dire situation even worse, according to some: The Social Security system’s large current reserves don’t really exist. That’s because, they argue, those reserves were deposited with the U.S. Treasury, where the money has long since been spent.
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If the point of those who regularly repeat these stylized facts is to scare people, they have certainly succeeded. A recent survey from the Transamerica Center for Retirement Studies found that 80% of millennials agree with the statement: “I am concerned that when I am ready to retire, Social Security will not be there for me.”
But it’s not just the scaremongers who stoke the fires of fear. Recently, the front page of the New York Times business section carried an article under the headline: “Social Security is Staring at Its First Real Shortfall in Decades.”
I take issue with this crisis narrative. The future is unknowable, and uncertainty can certainly be scary. But in a ranking of things to worry about, I would place a number of other uncertainties far higher than whether Social Security “will be there for me.” How will the stock market perform over the next few decades, for example? Is much higher inflation about to rear its ugly head? Where are interest rates headed?
The impact of a wrong answer on any of those questions is definitely something worth worrying about.
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In the meantime, it’s simply not accurate to say there is a Social Security crisis, in the sense of “a sudden change” or a “turning point,” to quote the standard dictionary definitions of crisis. There is nothing about Social Security’s finances today that hasn’t been known for decades.
In fact, Andy Landis, author of “Social Security: The Inside Story” and a former Social Security Administration representative, tells me that in 1983, after the last time Congress made changes to Social Security’s funding mechanisms, its actuaries projected that the system would be able to meet all obligations until the mid-2030s. So it’s hardly a surprise to “discover” today what has been known for four decades. There’s no more of a Social Security funding “crisis” now than at any point since the mid-1980s.
It is true that, unless further funding changes are instituted, the Social Security trust fund will need additional funding in 2034. Note, however, that this prospect is analogous to the situation that faced Social Security in the early 1980s; like now, for many years before then, projections had shown that the system would eventually run out of money. The 1983 amendments to Social Security, which resolved the funding shortfall, weren’t finally approved until just four months before when the system would otherwise have run out of money.
I wouldn’t be surprised if our politicians wait until the very last minute this time around, too.
But expecting procrastination is different than predicting that our politicians will let the Social Security system actually fail. Given the political clout of retirees and soon-to-be-retirees, I believe it’s a relatively safe bet that they won’t let that happen.
I could be wrong. Nothing is 100% certain. But to put into perspective the risk of the politicians failing to rescue Social Security, consider the range of possible stock market returns over the next 15 years—through 2034, in other words. Since 1871, according to data from Yale University’s finance professor (and Nobel laureate) Robert Shiller, the stock market’s SPX, +0.27% 15-year inflation-adjusted total return has been as low as minus 26% and as high as 673%. (Note that these are compounded, rather than annualized, numbers.)
Compared with that huge range of uncertainty, Social Security’s uncertainty is remarkably small: After 14 more years of receiving 100% of scheduled payments, there is a slight possibility that a recipient would incur about a 20% reduction in Social Security payments in 2034.
Which of these two do you think is more worrisome?
What about the argument that the Social Security trust fund is currently broke, by virtue of depositing its assets with the U.S. Treasury where they have long since been spent? I don’t find that argument persuasive either. What the Social Security Administration has done with its reserves is no different than what virtually every publicly traded company does with its excess cash.
Consider the huge cash hoard on Apple’s AAPL, +0.25% balance sheet: As of the end of 2018, according to Apple’s latest 10-Q, $56 billion of that cash was invested in U.S. Treasury securities and U.S. agency securities. Just as is the case with the Social Security trust fund assets, the U.S. government has long since spent the money Apple used to buy U.S. government bonds.
To be consistent, those who argue that Social Security is currently broke must therefore also wipe that $56 billion off of Apple’s balance sheet. No one does, of course. That’s because most trust the government, with its power of the printing press, to eventually return those assets—with interest.
The alternative to the Social Security Administration investing its trust fund assets and thereby earning a return, of course, is to keep all those funds stuffed in a veritable mattress—earning nothing. Does anyone really recommend the Social Security Administration do that?
None of this discussion means that Social Security’s funding doesn’t need to be shored up. It most certainly does, and the sooner that changes are enacted the easier it will be.
But don’t give up on Social Security, just because of its uncertainties, while simultaneously celebrating the virtues of investing in the stock market, where you face the prospect over the next 15 years of either earning riches beyond the dreams of avarice—or losing big.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.