Social Security is Broke

On Monday the Social Security Administration issued their annual report. This story was relegated to a back page of the paper. Somehow the one and only story that’s going to affect every person in the country was less important than the optics of Mike Pence’s tax returns, which ultimately affects nobody directly. 

This 270 page report lists a number of issues. I’m going to read directly from the report and expand on some of its findings and what it means to us as real estate investors. 

When social security was brought into being by Congress on August 14, 1935 and then president Roosevelt signed it into law. At that time there were 13 people in the workforce for every one person who would ultimately collect on social security benefits. 

The average life expectancy in the US was 60 years of age in 1935. Today average life expectancy is 78 years of age. Today there are 2.8 people in the workforce for every person collected social security benefits. Over the next decade, the number of workers to beneficiaries is expected to decline from 2.8 today to 2.3. We will have fewer people contributing and more people collecting, a lot more. 

Together Social security and medicare accounts for 45% of US Federal Government Spending. Interest on the federal government debt accounts for 13% of spending, and military accounts for 17% of total spending. 

Last year 63 million people received social security benefits. 47 million retired workers and dependents of retired workers, 6 million survivors of deceased workers, and 10 million disabled workers and dependents of disabled workers.

We have known for some time that social security is running out of money. It’s been reported for years. It’s not a surprise . It’s simple demographics. But by law, the social security administration is limited in how it can invest its approximately 3 trillion dollars in reserves. That nest egg is expected to be depleted over the next 15 years to zero. The interest it earns on that 3 trillion dollars is a measly 2.8%. The only investment approved by the social security legislation is for the administration to invest in US treasuries. That’s right, the only permitted investment is US government debt. Let me get this straight. The US government prints money, then pays interest to itself on the money it printed in order to help fund its obligations. Does anyone else see a problem with this logic?

As investors, I expect that virtually everyone listening to this podcast knows how to consistently earn more than 2.8% on their money. The private sector knows how to do this with a high degree of confidence. 

So let’s look at the options available to the government. I don’t envy those in government. They really don’t have a lot of great choices, regardless of who is elected. 

They can increase taxes. They can lie about inflation, by under-reporting the real rate of inflation and thereby reduce the actual cost of living adjustments. That means that as time goes on, the revenue increases with the real rate of inflation and payouts are indexed to the reported rate of inflation which is less. That’s a way of reducing benefits without changing any existing rules. Or they can do the politically unpopular thing and explicitly reduce benefits. They could do this by raising the age of eligibility as has been done in many European countries, or by reducing the actual amount paid out. They could redirect revenue from other sources into social security. Finally, they could change how they invest the remaining 3T dollars and hope for a higher rate of return on their money. 

That’s about it. There aren’t really many choices left.  Politicians are still 15 years away from the system being completely 100% bankrupt.  I predict they will kick the can down the road again.