Social Security: The “Third Rail” No More

As a student at Boston University more than 30 years ago, I spent an inordinate amount of time commuting to class on Beantown’s transit system, affectionately known as “The T.” Back then, the trains were rickety, unreliable and sometimes dangerous.

I remember the subway tunnel signs that read: “Danger! Don’t Touch Third Rail.” The Boston Globe would intermittently run stories of unfortunate souls (often intoxicated students) who had been killed in grisly fashion because of contact with the electrified third rail.

These college memories have resurfaced in recent days, as I watch Republicans in Congress touch the “third rail” of American politics — Social Security. For those lacking a strong investment portfolio, it doesn’t bode well.

For many years, the press got in the habit of calling Social Security the third rail of politics. For a politician who cared about re-election, FDR’s retirement program for seniors was deadly to touch. Talk of significantly cutting or tampering with Social Security would kill your career, just as surely as touching The T’s third rail would fry you to a crisp.

No longer. Among the many political norms shattered since the presidential election of 2016 has been the notion that Social Security is untouchable.

And yet, demands on Social Security are growing every year. The following chart depicts Social Security outlays from 2000 to 2018 with an additional forecast from 2019 to 2029 as a percentage of U.S. gross domestic product (GDP).

Source: Statista

Social Security outlays totaled $982 billion in 2018, for about 4.9% of GDP. The forecast predicts an increase in outlays up to $1.8 trillion in 2029, which would amount to roughly 6% of projected GDP.

Paying for those tax cuts…

Politicians in Washington just can’t keep their hands off your Social Security. They’re now talking about cuts to social programs, especially to Social Security, as a way to close the massive federal budget deficit caused by the 2017 tax cuts. The most discussed curtailment of Social Security involves raising the retirement dates for eligibility. There’s a school of thought that the deficits were created on purpose by the enemies of social programs, as a way of forcing cuts. Regardless, those cuts are on the table.

Under current law, the “early retirement” age of 62 is when you can begin collecting Social Security benefits. However, I strongly advise you to wait for “full retirement” age, if possible. If you start your retirement benefits at age 62, your monthly benefit amount is reduced by about 30%.

Your full retirement age is determined by the Social Security Administration based on when you were born. For example: If your year of birth is 1943-1954, your full retirement age is 66.

Experts estimate that benefits drop roughly 7% across the board for each year that the full retirement age is increased. Current proposals for raising the age brackets are all over the map. Another proposal under discussion is to terminate or drastically reduce cost-of-living adjustments. Yet another idea currently making the rounds is to completely privatize the program — an old political goal that, like a zombie, never really dies.

To be sure, these GOP-led proposals would face a rocky reception in the Democratically controlled House of Representatives. But those who wish to slash Social Security benefits are persistent and they won’t quit trying. Indeed, GOP Senate Leader Mitch McConnell recently stated that his single biggest regret as leader has been his lack of success in significantly curtailing Social Security.

What’s that mean for you? For starters, keep investing in stocks. In your supposedly “golden years,” you can’t rely on Uncle Sam. To ensure a secure retirement, stocks are the best game in town. And year to date, it’s been a profitable game.

The half-time score…

Retirees can’t count on the government, but they can still count on stocks.

The three major U.S. stock indices closed out last Friday’s session posting their best performances in the first half of the year in decades. Friday was the last trading session of June and the close of the first half of 2019.

As of the market close on Friday, the S&P 500 was up 17% in the first six months of the year, its best first-half performance since 1997. The Dow Jones Industrial Average rose 14% over the six-month period to rack-up its best gain since 1999. And the tech-heavy Nasdaq gained more than 20%, reflecting its best first six months to the year since 2003. Year-to-date gains are 14% for the Dow, 17.3% for the S&P 500, and 20.7% for the Nasdaq.

The end of last week also marked a major watershed: the 10th anniversary of the current U.S. economic expansion.

To be sure, volatility accelerated in the second quarter, but the prices of both stocks and bonds rose. The key variables in the first half of the year will remain so throughout 2019: trade tensions between the U.S. and China, Federal Reserve policy, and the sustainability of growth.

Now that the expansion is the longest, how long before it runs out of gas? Born amid the rubble of the great financial crisis of 2008-2009, the recovery has been fueled by accommodative central bank policies and steady gains in job creation, with the U.S. unemployment rate now at 3.6%, its lowest in half a century.

But make no mistake, it has been a relatively weak recovery compared to its predecessors. U.S. GDP has averaged 2.3% since the recovery began in July 2009, compared to average growth of 4.3% for the other three expansions that made it past their seventh birthday.

But paradoxically, therein lays the recovery’s strength. Because the rate of growth has been modest, inflation has stayed under control. Assets are overvalued, but not to the dizzying degree that causes dangerous bubbles.

What typically kills recoveries? Not so much longevity as macroeconomic events, such as monetary tightening, unexpected shocks (such as a huge spike in oil prices), or the bursting of asset bubbles. None of these dangers are in place…yet. The Fed has signaled a surprisingly dovish tone, oil prices are actually in a slump, and assets are pricey but not at nosebleed heights.

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However, dangers lurk and traders increasingly fear a recession. One clear sign of investor anxiety is the plunge in bond yields around the world so far this year. Falling bond yields reflect investors fleeing into safe havens because they’re worried that the economic expansion is about to end. The trend also signals that expectations for inflation remain low, another red flag of sluggish economic activity.

The stock market is providing a different narrative so far this year, with U.S. equities posting all-time highs and world stock markets also robust. With headline risks mounting, we’re facing pull-backs this year. How should you invest now?

Rotate into stable companies that provide services that are consistently used regardless of market or economic conditions. The consumer staples, real estate and utility sectors are prime examples and they’re appealing now. Our flagship publication Personal Finance currently advises the following portfolio allocations: 50% stocks, 25% hedges, 15% cash, and 10% bonds.

Social Security will probably be around when you retire, in some form or another. But it’s likely that benefits will shrink over time. Build a diversified retirement portfolio that the grasping politicians in Washington can’t touch. As we used to tell ourselves when riding the subway in college, don’t take crazy chances.

Questions about Social Security and your retirement? Drop me a line: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.