Previously I blogged about retirement systems since they were getting a lot of negative attention in the Florida Legislature and in Congress. One of my tenets was that the economy is more of an issue in dealing with the sustainability of retirement systems than most other factors. Specifically I outlined the current Social Security issues, noting that the long-term borrowing rate and number of people paying into the system affected the apparent long-term viability at any given point in time. I also suggested that as a result, trying to opine about the viability of any retirement system at a specific point in time is a futile exercise, unless there is some underlying political agenda. The economics changes constantly, so the long-term trends are far better means to view the viability of pension programs. After the 2008 economic collapse, few retirement systems looked like they were in good shape, yet a few years earlier, they appeared much better, much like Florida’s did..
Fast forward to 2013. After all the hoopla in Congress about the fate of Social Security and scary Congressional statements that Social Security will not be remain for future retirees unless drastic changes are made, guess what? The annual trustees’s report on Social Security (and you though Congress managed it!) reported that as a result of the economic uptick in the past couple years, the outlook for Social Security in the short term is good, and the long-term is far better than it has been in years. Surprised? Only if you don’t understand how pension systems work. The economy has improved, so the investments made by Social Security likely are getting a better return. The jobless rate has dropped, and more people are paying into the system, precisely the two things that improve the long-term sustainability of any pension system. But we don’t hear Congress talking about that because that doesn’t address the political agenda.
Worse for certain Congressional leaders, the report suggests that Social Security is positioned better than many 401K programs, the type of system some in Congress suggest should be the future of Social Security, because the risk are far lower with Social Security’s investment strategy than any 401k invested in the marketplace. They noted that most 401k programs lost half their value in the 2008 financial collapse, while Social Security’s portfolio, invested in far more conservatively, did not see near the same type of drop in investment value. The report outlined that the lower and middle class retirees were hit less severely buy the 2008 downturn than upper middle class pensioners who relied more on 401K returns. That should be no surprise either.
The findings are particularly important for lower and middle class families that receive 2/3 of their retirement income from Social Security as private pension systems become a thing of the past. Those private pension programs suffered from investments in private companies that can have shifting stock values and outsourcing of jobs to other countries – more risk and fewer payees equals unsustainable pension program. No surprise the private sector has shed many of those programs, but precisely why Social Security becomes more relevant for most Americans. The private pension systems are precisely the opposite of the Social Security model.
So why the push to try to change retirement programs? Some are in difficulty, especially where there are generous benefits, and fewer people paying in due to cuts in government employees, and at risk investments strategies that have performed poorly. All three are management issues, and the second is a political issue. Bash public employee pensioners, because fewer private entities offer them, seems to be politically popular, but it is a political means to pit people with pensions against those who do not to hide the real issue which is simply money. The investment value of Social Security’s portfolio is huge. Wall Street would love to see that portfolio in the stock market. More investment dollars will drive up stock prices. That seems good, but recall that the repeal of the 1930s vintage banking rules that prohibited banks from investing YOUR savings in the stock market, drove stock prices up fast in the 1990s, but it didn’t turn out so well in 2008. Investing Social Security’s portfolio similarly can be expected to have a similar result. And then, Social Security will really be in trouble and someone in Congress will tell you – I told you so. Maybe the better argument is that all these politicians should keep their fingers out of pension plans.