A Wall Street Boost For Social Security
The aging of America is putting the squeeze on Social Security. About 10,000 baby boomers turn 65 every day and the number is heading even higher. Ready or not, our retirement system faces its first major overhaul in decades.
Lawmakers should listen to Warren Buffett before they settle on any new payroll tax or benefit schedules. “I’m a card-carrying capitalist,” Buffett says, “I believe we wouldn’t be sitting here except for the market system.”
Social Security should become a card-carrying capitalist too. It should invest part of its $2.8 trillion trust fund in the stock market, specifically in broad-based, low-cost index funds.
Call it a Wall Street boost for Social Security. It could make the coming overhaul less costly for workers and employers alike. It would effectively give tens of millions of low- to middle-income workers their first share ever in the market. Lastly, it’s the smart thing to do: research has shown the reward easily justifies the risk.
Trust fund dollars have always been invested in ultra-safe government securities. The idea of seeking higher returns by putting some of the money into stocks has been proposed before, but it’s never gone anywhere.
The coming reform (the first since 1983 and only the second ever) gives Congress a chance to begin making up for lost time.
And for lost opportunities too. By mid-March of 2019, the S&P 500 had risen by more than 300 percent from its financial-crisis low in March 2009. According to Goldman Sachs, the index’s annualized gain of over 15 percent represents one of its best decades ever.
The huge bull run didn’t add a penny to the Social Security trust fund. In fact the fund’s return over the same decade was lower than usual: many of its holdings were paying (and still are) abnormally low interest rates.
All the more reason to make sure a stock market boost becomes part of the overhaul. Let’s give the trust fund its first chance for substantial gains. Let’s keep pushing back the year the fund runs dry. The program’s trustees now estimate it’ll happen in 2035. If Congress doesn’t act before then, benefits will have to be cut by roughly 25 percent.
Both parties are well aware of the crunch. As usual these days, they’re gridlocked on what to do.
Republicans think the problem can be solved with just two words: stingier and shorter. Their proposals would hit future recipients with the double whammy of lower benefits and a later retirement age (an idea Buffett has also floated).
Democrats have lined up solidly behind a bill that goes in the opposite direction. It increases payouts by two percent and sweetens the formula for cost-of-living adjustments (COLAs). The money to pay for it would come from higher payroll taxes, especially on the biggest earners.
Payroll taxes are currently not collected on wages greater than $132,900. The Democratic bill would tax all earnings over $400,000. The rate itself (levied on both workers and employers) would rise 0.1 percent per year from 2020 to 2043, going from the current 6.2 percent to 7.4 percent. The system’s actuaries say these changes would keep the fund solvent into the 2090s.
All well and good, but adding a Wall Street boost could make the reform even better. The tax increase could be smaller. The trust fund’s solvency could be extended into the 22nd century. Millions of workers without workplace retirement plans could reap some of the same stock market gains as workers who have them.
Alicia H. Munnell lives and breathes retirement policy. It was her calling card for a top job in the Clinton Administration. Since then she’s been a professor at Boston College, where she founded and directs its Center for Retirement Research. In 2006 she co-authored the definitive book Social Security and the Stock Market.
It’s a probing, scholarly work. It doesn’t minimize the risks, including the political risks of putting the government in charge of investment decisions. It cites hundreds of facts, including these:
“After all, stocks yield 7 percent after inflation and bonds only 3 percent.”
“Two types of government pensions in the United States already invest in equities with no apparent ill effects,” the Thrift Savings Program for federal employees and state and local pension funds.
Adding the Social Security trust fund to the list would make that three. As Warren Buffett knows, it’s really no more than a bet on the future of America. If that’s not a good bet, what is?
Gerald E. Scorse is a former Post-Journal staffer. This article first appeared in the online New York Daily News.