Social Security had a disastrous 2023. Here’s why.

Data from the Social Security Administration’s trustees show that during 2023 the fund missed out on most of the year’s investment gains, costing America’s working stiffs hundreds of billions of dollars’ worth of lost returns.

Instead the fund actually underperformed the official inflation rate, meaning that during a year when stocks and bonds both ended up booming, and inflation plunged, the Social Security trust fund managed to lose money on the markets in real, purchasing-power terms.

I just cannot understand why Social Security is in such financial trouble. Or why it is heading for insolvency within a decade!

Maybe all those talking heads in Washington and New York are right. Maybe it’s because we’re all too greedy. Or we’re not having enough babies. Either way, is there, then, no alternative to “cutting” it, because it’s “unsustainable”?

Right now, all of us faithfully paying our FICA taxes have a total of $2.8 trillion invested in the Social Security trust fund.

If Congress had chosen to invest that money in an index fund tracking the S&P 500 index
SPX
of large-company U.S. stocks, our money would have earned us 25% this year. That would have been an extra $700 billion toward Americans’ pensions.

If Congress had been more cautious, and invested 60% of it in U.S. stocks and 40% in U.S. bonds, we’d have earned just under 18%. That would have been worth $500 billion.

Don’t miss: Classic 60/40 mix of stocks, bonds on verge of historic gains ‘after being written off for dead’

If Congress had simply chosen to invest 60% in a worldwide index of stocks and 40% in a worldwide index of bonds, it would have earned 16.4%, or about $460 billion.

But what did Congress do instead?

This year, like every year, the 535 geniuses on Capitol Hill chose to leave the trust fund entirely invested in low-earning Treasury bonds.

Actual returns for 2023? Less than 2.4%. No, really. That’s according to the Social Security Administration’s trustees themselves.

So our actual investment returns were a derisory $70 billion. Or, to put it another way, we missed out on at least $400 billion in investment gains that we should have had, if the trust fund were managed with an even basic level of competence.

Uncle Sam’s official figures say, or claim, that inflation over the last 12 months is 3.1%. Which means that our investment gains didn’t even cover this (flattering) measure of rising prices. We went backward.

This isn’t a one-off, I’m sorry to say. Social Security underperforms any normal pension-fund portfolio in almost every year. Over the past decade, a portfolio of 60% U.S. stocks and 40% U.S. bonds has earned an average of 9.6% a year; the global equivalent, 7.7%. Our Social Security dollars? Er … 2.6%.

As the trust fund has averaged around $2.8 trillion in assets throughout that period, this works out to more than $2 trillion in lost investment returns. (That’s 5% of $2.8 trillion, compounded over 10 years, if you’re interested.)

That should be our money.

No other pension fund does this. Not one pension fund run by a U.S. state. Not one teachers’ or police or firefighters’ fund. Not even trade unions can do this badly. They all invest in stocks as well as bonds, and they earn reasonable returns.

Nor do many members of Congress do this. Most of the people in Congress forcing us to invest our pension money in low-returning bonds have their own fortunes merrily invested in stocks. Many of them even trade those stocks, presumably hoping that their superior position and knowledge will give them an edge (although, apparently, many are deluding themselves).

But, for all this, Congress has repeatedly refused to change the law to allow Social Security to invest like every other pension fund in America (or around the world). Instead the fund is required to invest only in Treasury bonds.

The usual lie is that stocks are far too “risky” for Social Security. Apparently such statements are issued in between day trades of stocks on these people’s own accounts.

This policy is completely insane, until you realize the truth. That keeping our money in Treasury bonds allows Uncle Sam — including the 535 people Congress typically comprises — to plunder the fund freely for government spending.

Once you recognize this, you realize that the FICA taxes really are just another tax, not a pension contribution. As half of our FICA taxes are hidden — your employer pays them, which is a fiction — it really means that America has a flat 15.3% income tax, payable on the first dollar you earn. And it isn’t just flat but actively regressive, because you don’t have to pay it on any annual earnings over $160,200.

Cute.

Both parties, I’m sorry to report, are equally guilty on this front. Some Republicans — such as George W. Bush — wanted to invest Social Security funds in the stock market, but only as part of a fundamentally flawed proposal to create millions of individual private accounts. Democrats, on the other hand, flatly opposed any change.

A cynic might conclude that both parties want the trust to fail. Those on the left may figure that a financial crisis in Social Security will allow them to raise taxes. Those on the right may think it will let them cut spending.

But here’s how someone who was really, really cynical would reply: Those conspiracy theories assume these people are really smart — rather than, say, greedy, cowardly and stupid.

Happy New Year.