Rude Europeans used to tell stories, possibly apocryphal, about American tourists who would ask for directions to a famous landmark while actually standing right in front of it.
“Er, EXCUSE ME, SIR! Can you tell us please the way to the Eiffel Tower?”
The Parisian would look at the couple, look at the massive iron structure towering directly above them, and wonder how on earth Americans won the war.
Based on their handling of Social Security, the 535 people in Congress are even worse.
So let us celebrate a momentous event that quietly occurred last week, when suddenly a few overpaid legislators in Washington looked straight up and said, “oh, wow—do you think that’s it?”
Read: What most people get wrong about Social Security
The subject under discussion is the financial crisis hurtling toward America’s pension plan. The Social Security trust fund faces an accounting hole of about $20 trillion. It is expected to run out of cash in about a decade—at which point benefits could be cut across the board by 20%. This problem has been looming for years.
People on the “blue” team say the problem is that taxes are too low, especially on “millionaires and billionaires.”
Meanwhile people on the “red” team say, no, the real problem is that benefits are too high. (For everybody else, but not for you, naturally.)
It really has resembled nothing so much as a tourist couple in Paris arguing over a map.
So let there be rejoicing in the streets. At last! At last! Some senators and Congressman have suddenly noticed the massive, obvious answer towering right above them.
It’s the investments, stupid!
A bipartisan group of senators is suddenly talking about maybe, just maybe, stopping the most important pension fund in America from blowing all our money on terrible, low-returning Treasury bonds.
Congressman Tim Walberg Is also talking about something similar.
There is no mystery about why Social Security is in trouble. None.
Social Security invests every nickel in U.S. Treasury bonds due to a political maneuver by Franklin Roosevelt in the 1930s, who used the new program to sneak some extra taxes. It may even have seemed a reasonable investment choice back then, just a few years after the terrible stock market crash of 1929-32.
But it is a disaster. A sheer, unmitigated disaster.
No state or local pension plan does this. No private pension plan does this. No university endowment does it. No international “sovereign-wealth fund” does it.
Oh, and none of the millionaires or billionaires in Congress or the Senate does it either. These people blowing your savings on Treasury bonds? The ones saying there is no alternative?
They have their own loot in the stock market.
Of course they do.
Oh, and no financial adviser in America would advise you to keep all or even most of their 401(k) or IRA in Treasury bonds either, unless maybe you needed all of that money within the next few years.
For a longer term investor they’d urge you to keep much or most of your money in stocks. For a very simple reason: Stocks, while more volatile, have been much, much better investments over pretty much any period of about 10 years or more.
Read: ‘I don’t think I can wait until 70’: I’m still working at 66. Should I wait or claim Social Security now?
Even first year Finance 101 students know that Treasury bonds are a good safe haven but a poor source of long-term returns. This is basic stuff.
Don’t believe me? Try some simple numbers.
Since the Social Security Act was passed in 1935, the U.S. stock market has outperformed U.S. Treasury bonds by a factor of 100.
A dollar invested in Treasury bonds in 1935, with all the interest reinvested (and no taxes), would have grown to $52 today.
A dollar invested in the S&P 500 at the same time? Er…$5,700.
No, really. 100 times as much.
And over any given 35 years—meaning, roughly, the length a typical worker might pay into Social Security—stocks outperformed bonds on average by a factor of 5.
Bonds ended up around 800%. Stocks: 4,000%.
The chart above shows what would have happened since 1980 if you’d invested $1,000 in the Social Security trust fund and another $1,000 in the S&P 500.
It’s not even close. As you can see, we’re looking at outperformance by about a factor of 7. The S&P 500 beat Social Security by roughly 700%.
(These are using the numbers published by the Social Security Administration.)
Or just look at actual pension funds.
In the past 20 years, says the National Conference on Public Employee Retirement Systems, the average U.S. state or local pension fund has produced more than 2-1/2 times the investment returns of Social Security: 320% to 120%.
Social Security doubled your money. America’s other public pension funds quadrupled it.
But yeah, sure, the real problem with Social Security is the taxes. It’s the benefits. It’s all the peasants living too long. That’s the problem.
This is like a drunken driver totaling 10 cars in a row and blaming the transmission. Or maybe the upholstery.
If any private sector pension plan invested in the same way, the people running it would be sued into oblivion for breach of fiduciary duty. A financial adviser who kept all his clients in Treasury bonds throughout their career would be drummed out of the business.
None of the solutions need involve investing the whole thing in the S&P 500 SPX, +0.10% or (much better) a global stock market index fund. It’s not about one extreme or another. Most pension funds are about 70% invested in stocks, 30% in bonds.
But even a 30% allocation to stocks in the Social Security trust fund would have doubled total returns since 1980. No kidding.
If they’d made this change a generation or two ago, there would be no crisis. Nobody would be talking about higher taxes, lower benefits, or working into our 70s.
It really isn’t complicated. At last, only about 80 years too late, some people in Washington may be getting a clue.
This article was originally published by Marketwatch.com. Read the original article here.