Skip to main content

Greenspan Blew Chance to Fix Social Security

The ex-Fed chief whiffed when he headed a reform panel.

For the past quarter of a century, stock markets around the world have enjoyed the biggest boom in history. If you'd invested $1,000 on Wall Street in the early 1980s you'd have $13,000 or more today, and the numbers from many overseas markets are even bigger.

There's only one big group of investors who have missed out: those hoping to rely on Social Security in their old age.

In other words, you.

Throughout this period, while equities and other assets have soared, America's most important pension fund has had your money invested in low-yielding government bonds instead.

No wonder it's in crisis today.

This is, quite literally, a trillion dollar screw-up. And former

Federal Reserve

chief Alan Greenspan, who has been raising the alarm about the system, shoulders some of the blame.

He did, after all, head a commission on social security reform back in 1983, just when the great bull market began its run. To give him credit, he pushed through a number of important changes that has kept the system alive, such as taxing some benefits. But he left all the money languishing in Treasuries.

How badly has the fund done?

If you want to see, go to the back of the latest annual report from the Social Security and Disability Insurance trustees. Table VI.A4 in Appendix A shows all the money flowing in and out of the fund over the years.

The key line: "Net interest."

When you compare the net interest earned each year with the average assets in the fund during that year, you realize the alarming truth. Since 1984 your Social Security payments have been averaging, compounded, about 7.6% a year.

Wall Street over the same period: about 13% a year. That's from the

S&P 500


Scroll to Continue

TheStreet Recommends

Remember, we're not even talking about the kind of superlative returns that, say, Jack Meyers was able to get for the Harvard University endowment, or Warren Buffett produced at

Berkshire Hathaway



We're just talking about the kind of returns anyone could have got from a simple Vanguard index fund.

Anyone, it seems, but Uncle Sam.

How big a difference would this have made? The numbers are startling.

Under the current system, Social Security by the end of last year had accumulated $2.048 trillion in assets.

But if the fund had been earning the same returns as the S&P index over the past 24 years, calculations show its assets today would be $3.013 trillion.

You read that right: a trillion dollars more.

No, it wouldn't have eliminated the funding crisis. But we'd be in a lot better shape today.

When you're running out of money, every trillion counts.

OK, it's only an estimate. A ballpark figure.

But it's not even a particularly heroic one. Investments in other asset classes, like overseas stocks, emerging markets, high-yield bonds, managed timber and hedge funds, would have produced even greater returns.

Some people insist Social Security funds could never have invested in stocks because it would have "politicized" the investment policy. That's nonsense. Where there's a will, there's a way. The Massachusetts state pension system invests in a diversified portfolio, including everything from Wall Street to emerging markets to hedge funds to managed timber. How? Independent trustees pick outside investment companies that actually make the investments. Some other countries, such as New Zealand and Norway, also invest their government pensions in a diversified portfolio.

The simplest way Social Security could have invested on Wall Street would have been through a strict index fund approach. That would have avoided any qualitative decisions about one company over another.

As for "politicizing" Social Security: For the last 24 years it has been used to prop up massive Federal deficits, so successive governments could lie and say they were cutting taxes when they were merely deferring taxes. If that isn't political, I don't know what is.

This is more than just a theoretical exercise. Tens of millions of Americans are going to have to work longer before retiring, and will be poorer in old age, because Social Security funds were invested so conservatively.

Investing our Social Security money in government bonds instead of the stock market created a second problem as well.

It meant Congress could blow the money on pork, since these funds are co-mingled with other government revenue. And guess what? It did.

"All of the money that is going to support you and me is spent right now," says Dan Fuss, the bond fund guru at Loomis Sayles. Of Social Security's published accounts he says: "Don't believe 'em. The cash impact (of the funding shortfall) hits eight years."

"Congress essentially spends the money and issues a special form of IOU," says Pozen. He adds that the trust fund "exists, but only as intragovernment debt. Congress will have to come up with the money."

Naturally, IOUs issued by Congress are never actually paid by Congress.

Who will have to pay them off? You got it.

In keeping with TSC's editorial policy, Brett Arends doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arends takes a critical look inside mutual funds and the personal finance industry in a twice-weekly column that ranges from investment advice for the general reader to the industry's latest scoop. Prior to joining in 2006, he worked for more than two years at the Boston Herald, where he revived the paper's well-known 'On State Street' finance column and was part of a team that won two SABEW awards in 2005. He had previously written for the Daily Telegraph and Daily Mail newspapers in London, the magazine Private Eye, and for Global Agenda, the official magazine of the World Economic Summit in Davos, Switzerland. Arends has also written a book on sports 'futures' betting.