If Social Security were one of your private investments, instead of an entitlement, you might actually look for other options.
Here’s why.
Nominal Interest Rates On Special Issues in APY. From the Office of the Chief Actuary, Social Security Administration.
Since 2000, the Social Security Trust Fund has consistently been earning a lower and lower return on investment each year. From April 2020 to January of this year the tax dollars you contribute to that fund have earned less than 1%.
You can see 2020’s performance reflected on the official interest rate chart to the right. Note these are APY measures, just like those reported on bonds or CDs.
To put this paltry performance into perspective, you can easily find savings accounts that come close to matching recent Social Security Trust Fund performance by offering 0.5% APY. Or 3-year CD rates that actually beat the trust fund’s performance almost half the time.
Most pension plans seem to be performing better than Social Security (and they still needed bailouts).
“So far in 2021 the fund’s returns have been less than the rate of inflation,” writes Brett Arends for MarketWatch.
The Social Security fund desperately needs someone to address its imminent shortfalls before 2034.
Arends highlights one way to think about the poor performance of the Social Security program, which comes in exchange for your involuntary, mandatory 12.4% annual tax contribution (between you and your employer):
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.
It also appears the funding gap for the fund increases at a faster rate than even some of the worst pension programs.
According to the 276-page 2020 Social Security Trustees report, this year’s funding gap is enormous, and a staggering 20.8% higher than just last year:
The open-group unfunded obligation for OASDI over the 75-year period is $16.8 trillion in present value and is $2.9 trillion more than the measured level of $13.9 trillion a year ago.
That unfunded obligation equals about $50,602 per person in the U.S. To think about it another way, it’s about 78.4% of the current GDP.
And it gets a bit worse…
“Trust” Could Be Too Strong of a Term to Describe the Fund
It’s a good thing the Social Security Trust Fund isn’t a private retirement fund, because the word “trust” might be too strong.
According to the Heritage Foundation, here’s the difference between a real trust fund and the Social Security trust:
Private-sector trust funds invest in real assets ranging from stocks and bonds to mortgages and other financial instruments. However, the Social Security trust funds are only “invested” in a special type of Treasury bond that can only be issued to and redeemed by the Social Security Administration. [emphasis added]
Maybe that’s why the rate of return is so small? It’s also quite odd that Social Security seems to put all its eggs in one basket (even though it’s a large basket)… Maybe they haven’t seen the SEC’s advice on the magic of diversification.
The Social Security Trust Fund’s apparent investment philosophy leads some experts to classify the fund as a sort of Ponzi scheme: “The Social Security assets are just invested in Treasury bonds anyway, so essentially the government is borrowing from and paying interest to itself, making the interest process somewhat moot.”
Here’s what a Social Security Advisory Council report has to say:
While we do not agree with many of the characterizations of Social Security as nothing more than a Ponzi scheme, we can understand why some citizens might resort to such characterizations when they see proposals of this sort. [emphasis added]
So, let’s review… The “trust fund” faces a few challenges:
- Below-inflation returns
- Yields barely competitive with savings accounts and CDs
- A decidedly subpar performance record (if the trust fund was “a private sector pension fund there would be lawsuits everywhere”)
- Possibly in worse shape than recently-bailed-out pension funds
- An astonishing lack of diversification, counting on one big basket for all its remaining eggs
- An advisory council that admits it can “understand why some citizens might” call it a Ponzi scheme
MarketWatch’s Arends summarizes the situation like this: “242 million Americans are forced to pin their retirement hopes on a system that is being knowingly left in crisis by those in charge.”
Perhaps these concerns might give some perspective to Social Security’s role in your retirement plans.
Don’t Pin Your Retirement’s Success Solely on Social Security
Quite possibly the only good news about Social Security is, you have the option not to rely on its success to enjoy your retirement.
In such an uncertain environment, consider following the advice of many personal finance experts: save as much money as you can, diversify your savings, and don’t forget to fortify your nest egg with precious metals. Both gold and silver can provide protection against inflation for your savings regardless of whether the Social Security Trust Fund keeps pace over the next decades.
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It has always been little more than a wealth transfer scheme and a way to purchase the votes of the elderly and those who feel guilty about not taking care of their parents. There has NEVER been a “lockbox,” and whatever chance the system had of lasting a long time before collapsing, ended in the 1960s when the government started spending every last dime it could find on welfare and warfare and filling the accounts with IOUs. I’m not saying everyone didn’t get the shaft. I’m not saying that YOU didn’t pay in tens if not hundreds of thousands of dollars. But the government NEVER made any promises that will hold up in court any better than their campaign promises hold up. There is nothing on their own website that says that you are guaranteed to get a DIME when you reach a certain age. Tomorrow they could shut the whole thing down and that would be the end (but of course none of the supporters would ever get re-elected). The monies taken in have gone to pay off the folks already retired. Your check will require the theft of monies from someone else. When things started it was around 16 folks to cover the check. Now its around 2 to cover the checks. The money will always keep coming, even if the check only buys a week’s worth of groceries. We have all been duped and there was nothing we could do about it (except vote for folks who wanted serious changes…..but we all know how well those folks did).
If you were forced into the Ponzi scheme early, and lived a long time, then you rose to the top level of the pyramid and cashed out ok. If you are only being forced in now, the future is likely grim, especially when it comes to how much that monthly check (regardless of its size) will buy. Of course everyone could have done better on their own. But government needed the money to buy votes, terrorize the elderly, and set up generational hatred. Welcome to Amerika.
You Tuber BELANGP has shown over about the last 50 years the best returns have been a 65% portfolio of stock and 35 % gold.
I spent 2 weeks in Iraq one year arguing with my PL about the existence of a Trust Fund. I had to go back and do more research and concede we were both wrong. It does exist, but merely as an accounting fiction. I was arguing it only existed in name. He was only going to be happy to admit I was wrong. Luckily we found a better PL shortly after.
Don’t be deluded that your “Private Investment” is in any better condition. If you dug into the layers of BS, you would see that whatever brokerage that handles your account has (arranged) for your money to be diverted to any other investment instrument in their stable if and when that instrument goes into the shitter. Fund failures could suck the life out of your account even if you don’t hold them.
Another good reason to hold physical metals.