Let's all agree that, going forward, we'll stop saying that Social Security will 'run out of money' in 2032
Social Security is not about to go bankrupt. In fact, it almost certainly will enjoy many more returns.
Social Security will still be an impressive retirement income program even if it "runs out of money" in 2032.
I put "runs out of money" in quotes, because that is how many in the popular press are describing what may happen six years from now. But it isn't accurate. Even if Congress does nothing to shore up the system's finances, beginning in 2032 it still will be able to pay out 78% of the benefits to which recipients are entitled.
That isn't to say that a 22% haircut wouldn't inflict serious financial hardship on millions of retirees. But such a reduction is a lot different than paying out nothing. Social Security is in such strong shape that it can incur a 22% haircut and still be an impressive retirement income security program.
The occasion for pointing this out is Social Security's 91st birthday, which falls next week. It was on Aug. 14, 1935, that President Franklin D. Roosevelt signed the Social Security Act into law. The bankruptcy narrative makes many people think Social Security won't make it to its 100th birthday. In fact, it almost certainly will enjoy many more returns (even if not particularly happy ones).
Consider how much it would cost you to create a portfolio that would replicate Social Security's average monthly payout (which this year is $2,083) until 2032 and 78% of benefits thereafter. The closest analog would a 30-year TIPS ladder - a portfolio of individual inflation-protected U.S. Treasury bonds that mature periodically between now and 30 years from now. Like Social Security benefits, this ladder's payouts would be automatically adjusted for inflation.
According to TipsLadder.com, such a portfolio would cost approximately $433,000. To put that sum in perspective, consider that the vast majority of American households have saved far less for retirement. Vanguard reports that 401(k) investors at the firm had an average account balance of $167,970 at the end of last year, with a median balance of just $44,115.
(To be sure, a TIPS ladder is not a perfect substitute. Unlike Social Security, a 30-year TIPS ladder is exhausted after 30 years, while Social Security continues paying benefits until the death of the recipient. However, a TIPS ladder is superior to Social Security in another respect: Following the death of a holder, unspent assets are available to heirs. An inflation-adjusted annuity would be a better analogue to Social Security, but no such product is currently offered.)
The bottom line: Even with a 22% haircut in 2032, Social Security will remain the 800-pound gorilla when it comes to retirement income security. Let's all agree that, going forward, we'll stop saying that Social Security will "run out of money" in 2032.
If you want to create a TIPS ladder, your job is made far easier by the free tools at TIPSLadder.com. After indicating how much you want to spend or the inflation-adjusted amount you want the ladder to produce each year, the website tells you the specific TIPS to buy (including CUSIP numbers) and how much to allocate to each. There's no need to pay an adviser to create it. You can purchase the rungs of a 30-year TIPS ladder in about an hour, estimates Allan Roth, who is the founder of Wealth Logic, a financial planning firm, and from whom I first learned about TIPS ladders.
Congress will likely shore up Social Security's finances - at the last minute
In pointing out that Social Security will be bloodied but not bowed in 2032, I'm not excusing Congress from taking the necessary action to restore the system to full financial health. But it's worth remembering that Congress consistently kicks the can down the road until it has no choice but to act, and that's likely to be true in this case as well.
Consider the legislation Congress passed the last time Social Security was on the brink of not being able to pay out 100% of benefits. The drop-dead date in that case - which Social Security's actuaries had identified well in advance - was July 1983. Consider the timeline of congressional actions to restore Social Security's finances:
-- September 1981: Less than two years prior to the drop-dead date, President Ronald Reagan appoints a bipartisan commission to propose a solution.
-- January 1983: Six months prior to the drop-dead date, the commission issues its final report.
-- February 1983: Five months prior to the drop-dead date, Congress holds hearings on the commission's recommendations.
-- March 1983: Four months prior to the drop-dead date, Congress passes the Social Security Amendments of 1983.
-- April 20, 1983: Just 72 days prior to the drop-dead date, Reagan signs the legislation into law.
Notice what this timeline portends, assuming Congress acts with similar alacrity this time around: It wouldn't begin to seriously consider bipartisan solutions until late 2030, and the legislation to restore Social Security's financial health wouldn't be signed into law until July 21, 2032, which would be 72 days prior to the first day of that year's fourth quarter, the quarter when Social Security's actuaries project that the system will stop being able to pay out 100% of benefits.
Congress still should act as soon as possible, of course, since solving Social Security's finances becomes more expensive the longer it's put off. And, to reiterate what I wrote above, a 22% haircut would cause serious financial hardship to millions of retirees.
What this walk down memory lane suggests is that the doom-and-gloomers are likely making things seem worse than they really are. And sloppy thinking does not help lead us to a speedy resolution of Social Security's financial challenges.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.
-Mark Hulbert