That screeching, deafening sound coming out of Capitol Hill all last year? It was the sound of Congress fiddling while Social Security burned.
Your (and my) most important retirement account has hurtled yet closer to insolvency after another terrible year.
And this wasn’t the result of an accident, or chance. It was the intentional outcome of the deliberate, disastrous policies embraced by the people supposedly running our government.
This was a year when an S&P 500 index fund
earned 26%, or more than 10 times as much. An international index fund, such as Vanguard Developed Markets
earned 16%. A simple U.S. bond fund, such as iShares CORE U.S. Aggregate Bond
Social Security could have earned 5% just by rolling its money over into Treasury bills. Gold
It required real skill to end up earning just 2.4% on your investments last year, when even some bank deposits were earning nearly 5%.
To give you an idea of just how shameful this fiasco is, consider this: You, me and everyone else has a total of $2.8 trillion invested in the Social Security trust fund.
Those investments, the Social Security trustees have just disclosed, earned a grand total of $67 billion last year.
If they had been invested, like a normal pension fund, in a simple balanced index fund — 60% stocks, 40% bonds — or in a low-cost mutual fund VBAIX, they’d have earned $450 billion or more, depending on whether you’re looking at global or U.S.-only indexes.
So we all got hosed to the tune of about $400 billion. That comes to about $2,200 for each person currently paying into Social Security. To put it another way, the amount we missed out on is equal to about one-third of all the Social Security payroll taxes we did pay.
None of this is the fault of the Social Security trustees. They are required by law to invest only in U.S. Treasury funds. It’s the fault of Congress, which passed that law in 1935 and has never once updated it — even though, during the past 80 or so years, our understanding of investment principles has been revolutionized.
This policy makes about as much sense as legally requiring the trustees drive to work in Ford Deluxe Tudors, a popular car on the roads back in 1935, and dance the Charleston at the office party.
Since 1940, according to Social Security Administration data, the trust fund has earned an average of 5.1% a year. That’s less than half the 12.4% average return from the S&P 500. The trust fund has underperformed a portfolio of 60% U.S. stocks and 40% U.S. Treasury bonds by an average of 4.3% percentage points per year. It has done worse than a 60/40 fund in two years out of three. That includes two years out of three so far this millennium.
The original excuse for this absurd investment policy is that because Social Security was set up in 1935, in the wake of the worst stock-market collapse in U.S. history, people were — understandably — more than a little wary of Wall Street.
The current excuse is that the money has to be kept in U.S. Treasury bonds because investing the trust fund in stocks would “politicize” investments. You’d think these people had never heard of index funds. Or of the vast number of public-sector pension funds around the country that invest in the stock market (thank heavens).
Of course this excuse is nonsense. The real reason the political class — of both parties — keep our $2.8 trillion stuck in low-yielding Treasury bonds is to flatter Uncle Sam’s accounts.
Then they say they are “shocked — shocked” that the trust fund is set to run out of money in a decade. How stupid do they think we are?
The good news is that our political masters are working on a terrific plan to shore up Social Security: Raise our taxes, cut our benefits and (probably) leave the trust fund invested just the same as always.