Social Security Isn’t As Secure As You Think

From Peter Reagan for Birch Gold Group

Back in March 2021, we explored why you’d be wise to look elsewhere if the Social Security trust were a private investment you’d chosen to invest in, rather than a government program you were obligated to participate in.

The upshot? If Social Security were run like any other investment, there would be lawsuits everywhere.

It’s been three years, and we regret to inform you that the situation not only hasn’t improved; in many ways, it’s gotten worse.

Now, remember, this is your money we’re talking about! So let’s consider exactly how secure Social Security really is…

The opposite of diversification

The Social Security taxes you pay don’t go into a bank account – instead, there’s a Social Security Trust Fund. The Trust is required by law to invest in exactly one asset: U.S. government debt.

If you’re thinking, “Isn’t that the opposite of diversification?” you get a gold star. The Trust is putting all of its eggs into one basket. There’s zero protection against dollar devaluation, interest rate fluctuations or, horror of horrors, debt default.

There is a small piece of good news though – the government is in such terrible financial shape that they’re incentivizing creditors by offering higher rates. Take a look:

The Trust Fund is making 350% more on its investments today than it was back in 2020.

Good news, right?

Well, not quite…

The cumulative rate of return from 2021-2023 is 8.7%.

The cumulative rate of inflation over the same period? 16.2%…

We’ve spent a lot of time in the past discussing cost-of-living adjustments (and how they aren’t a “raise” at all). Even so, when inflation goes up, Social Security checks go up, too – and it’s pretty clear from the numbers that money is going out faster than it’s coming in.

Part of the issue is that the Social Security Trust simply isn’t getting very much of a return. Consider an alternative to government debt – the humble bank certificate of deposit (CD). Top online banks pay between 4.3-5.25% in annual interest! That’s better return than the Trust’s recent performance.

But, again, according to the law of the land, the Social Security Trust can’t go out into the investment market and shop around for a better return. They’re stuck with government debt.

The combination of low returns on investment and rising COLA payments has left Social Security with a pressing problem…

They’re running out of money.

Social Security’s funding “gap” is more like a canyon

Social Security has to do two things:

1. Pay out current benefits
2. Manage funds to ensure future benefits will be available when they’re due

At the moment, they’re accomplishing the first.

The second, though? Well, there’s trouble…

The funding gap ($16.8 trillion in 2021) has grown significantly over the last couple of years.

Today, that gap is $22.4 trillion, according to the latest Trustees’ report.

That’s a massive number – to put it into perspective, Social Security is short about 84% of national GDP.

For comparison purposes, the federal government’s entire revenue for 2023 was $4.4 trillion. It would take five years’ worth of tax payments to set Social Security back on its feet! (But the federal government isn’t doing that – rather, they’re spending $1.38 for every $1 collected in taxes.)

Both Social Security and the federal government are going backward right now.

So the real question is, are our Social Security benefits safe?

Urgent action required

According to the Trustees report, here’s what it would take to keep Social Security fully funded:

(1) revenue would have to increase by an amount equivalent to an immediate and permanent payroll tax rate increase of 3.44 percentage points to 15.84 percent beginning in January 2023;
(2) scheduled benefits would have to be reduced by an amount equivalent to an immediate and permanent reduction of 21.3 percent applied to all current and future beneficiaries effective in January 2023, or 25.4 percent if the reductions were applied only to those who become initially eligible for benefits in 2023 or later; or
(3) some combination of these approaches would have to be adopted.

Since January 2023 has come and gone without these changes, what are we looking at?

Starting in 2033, Social Security will only be able to pay 77% of scheduled benefits.

That’s right – a 23% across-the-board pay cut, for everyone, is forecast in the very near future. (And that’s a best-case scenario.)

As Jean Folger explained with cutting disdain:

Social Security was created as a contributory old-age insurance plan with limited and phased-in benefits for retirees in 1935. The program extended benefits to survivors of beneficiaries by 1939, to farm and domestic workers and the self-employed in 1950, and to disabled workers in 1957. Congress postponed planned payroll tax increases during the program’s early years.

The pattern of favoring political expediency over the system’s long-term solvency persists.

“Political expediency,” in this case, means handing out more money without collecting more money.

It’s the continuation of a pattern since the “early years,” but now the politically expedient decisions made over the decades are coming home to roost.

Here’s the bottom line summary: The trust fund still faces critical challenges three years after we last peeked under the hood:

• The hard-earned dollars you put into what is supposed to be a guaranteed retirement security program are already spent.
• The Trust’s reserves are barely competitive with savings accounts and actually making less than some bank CDs.
• The program is running out of money in the near future and there are no solutions on the table (though one proposed workaround is essentially to rob private savings to make up the shortfall)
• Extreme lack of diversification means the fund is violating the most basic laws of common-sense investing

This is a big problem.

Once again, if Social Security weren’t a government monopoly, there would be lawsuits all over the place.

So what can we do about it?

Proper diversification can help ensure your own financial security

Don’t expect much from Social Security. Instead, do your best to ensure your own financial security.

Diversification into different asset types is a good (and highly underrated) idea. But there are also two more ways to consider diversifying which could also help with your retirement planning success:

1. Diversify into different account types.
2. Diversify into different asset types.
3. Diversify across different time periods.

Proper diversification could provide you with significant peace of mind, even during bad economic times. A solid strategy could also allow the flexibility to avoid relying solely on Social Security benefits to fund your retirement. Physical precious metals can help – their resistance to inflation and lack of correlation with other financial assets makes them an ideal complement to your retirement savings.