It was the spring of 1982. Ronald Reagan was just over a year into his first term, and the US economy was still in pretty rough shape.
Interest rates remained sky-high, inflation was still hovering around 7%, and deficits continued to rise. But even with all that despair, the US government had a more immediate problem to tackle: Social Security.
It had been roughly fifty years since Social Security’s creation back in the 1930s, and the program was almost insolvent. In fact, the trustees warned Congress in 1982 that Social Security’s main trust fund would run out of money the following year (in 1983).
In short, tens of millions of retirees were about 15 months away from having their benefits cut.
Reagan formed a commission, chaired by the recently departed Alan Greenspan, to study the shortfall.
And in a matter of months, Congress passed legislation based on Greenspan’s recommendations. Essentially, they waited until the money almost ran out, and then aggressively took action.
So what did they do? Well, for starters, they jacked up payroll taxes— from just over 10% to 15.3%.
They also increased the retirement age… and monkeyed around with the program’s annual cost-of-living increases.
In short, they made the program solvent again by forcing everyone to chip in. Workers paid more. Businesses paid more. Young people had to contribute longer to receive benefits. And even Social Security recipients took ‘cuts’ after adjusting for inflation.
These reforms eliminated the immediate crisis, and Social Security would remain solvent for at least 75 years (i.e. into the late 2050s).
Alan Greenspan just died a few days ago at the age of 100. And ironically this is part of the reason why those long-term Social Security projections did not hold.
Americans live far longer than the actuaries calculated in 1983, meaning that Social Security recipients collect benefits for far longer. More importantly, the fertility rate of subsequent generations has collapsed behind them.
To put this in context, back in 1960, more than five workers contributed to Social Security for every retiree drawing benefits. Today that ratio is less than 3:1.
Now the program is at a similar cliff; earlier this month, Social Security’s trustees stated that the fund would be fully depleted by 2032. That’s just six years away.
So, if history is any guide, it means politicians will likely wait another five years to solve the problem… then around 2031 they’ll act aggressively to force everyone to chip in.
The one recent development is that they are sort of acknowledging the problem.
House Speaker Mike Johnson recently said Social Security and Medicare have to be “adjusted and fixed”, and that Republicans have a plan to do so next year. Of course, he didn’t say what the plan was, let alone introduce a bill.
That’s probably because this is an election year, and talking about real solutions is not a viable election strategy.
Perhaps that’s why pretty much the only other members of Congress who are willing to talk about Social Security are those that won’t be coming back— whether because they’re retiring, or they lost their primary, like Senators Bill Cassidy, Dick Durbin, and Thom Tillis.
There are a few outliers, including Rand Paul, who are pressing for urgent action. But Social Security reform clearly is not a priority for this Congress.
And that’s unfortunate, because inaction makes the eventual solution even more painful.
If they had taken action 5 years ago, the resulting payroll tax increase would have been negligible. Taking action today would require about a 4% increase. Waiting until 2031 will require a far greater tax increase.
It will be the same with other Social Security reforms. The longer they wait, the more severe the inflation-adjusted benefit cuts will be. The longer they wait, the higher they’ll have to hike the retirement age.
Realistically those are the only solutions.
There has been some discussion about ‘privatizing’ Social Security… which is a great idea in theory.
Just imagine handing Social Security’s $2.3 trillion trust fund over to the greatest asset manager in US history— Congressman Ro Khanna of California, who, since joining Congress, has outperformed the S&P 500 by over 112%!
Mr. Khanna could invest that $2.3 trillion trust fund so effectively that not only would Social Security become solvent on an infinite timeline, but he’d probably pay off the national debt too!
Unfortunately privatization of Social Security is a complete fantasy.
Let’s even forget about political opposition (because Bernie Sanders will be clinging to Social Security with his cold, dead hands). The larger issue is practicality.
Technically, yes, Social Security’s key trust fund holds about $2.3 trillion; but that balance is depleting rapidly, and, again, will run completely out of money in six years.
So in a few years there will be nothing left to privatize!
But even now, the trust fund’s $2.3 trillion isn’t money, but rather a mountain of IOUs— special “non-marketable” US government bonds that cannot be sold or traded. They can only be redeemed to the Treasury Department.
Unfortunately the Treasury Department does not have a spare $2.3 trillion lying around to repay the trust fund.
So before Social Security could even be privatized, Treasury would first have to borrow $2.3 trillion to repay the trust fund… which is a pretty tall order in this bond market. Interest rates would likely spike as a result.
That’s why, ultimately, it’s smart to expect higher payroll taxes, inflation-adjusted cuts to benefits, and (if you’re 55 or younger), a hike in the retirement age.
One sensible strategy is maxing out tax-advantaged retirement accounts; they can not only reduce your taxable income, but they help grow your retirement savings in a tax-efficient way.
We’ve also been vocal about owning real assets. When Congress refuses to balance the budget or act responsibly, it seems pretty clear that the only real option is for the Fed to ‘print’ trillions of dollars to make up the difference.
Real assets tend to hold their values in inflationary environments. And the businesses that produce them (gold miners, energy producers, etc.) often perform spectacularly well.
Our premium investment research, Strategic Assets, is focused exclusively on these businesses: deeply undervalued real-asset producers with pristine balance sheets, high-growth earnings, and catalysts the market hasn’t priced yet.
Many of the companies featured in our research are up 5x and beyond, and we believe several others are primed for similar growth. You can learn more about our investment research here.
