Social Security: The “Third Rail” No More
As a student at Boston University during the 1970s, 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 signs along the tracks that read: “Danger! Do Not 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 members in Congress gear up to slash Social Security.
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 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. For those lacking a strong investment portfolio, it doesn’t bode well.
The non-partisan Congressional Budget Office (CBO) reported on Tuesday that U.S. gross domestic product (GDP) growth is on track to reach a “solid” pace of 2.2% in 2020. That’s the good news.
Now the bad news: The CBO yesterday also projected that the federal budget deficit will hit $1.015 trillion this year. Federal deficits are expected to average $1.3 trillion per year between 2021-2030. Politicians are seizing on the new data as an excuse to cut Social Security.
Below, I’ll show you how to protect your Social Security benefits and also grow your retirement portfolio.
The massive federal deficit isn’t just an abstraction. It poses a tangible long-term threat to investors. The deficit will drive up interest rates and tie the hands of policymakers when the next recession hits. The 2017 tax cuts that fueled the deficit only provided a short-term stimulus, mostly in the form of stock buybacks (with little in the way of business investment).
Several mounting risks are likely to come to fruition in 2020. The deficit is one of them. The Wall Street consensus is that 2020 will prove a positive year for stocks, but with gains more modest than those of 2019. For one thing, high valuations and negative earnings growth represent an untenable combination.
Interest rates are low but they won’t stay that way forever. The federal government must issue bonds to finance the exploding deficits. Making such a large amount of bonds attractive to buyers will require higher yields.
Higher bond yields boost borrowing costs, which hurts economic growth and corporate profitability. Higher yields also make bonds a more attractive alternative to riskier stocks and they make excessive equity valuations harder to justify.
Social Security’s growing burden…
As the population ages and growing ranks of Baby Boomers retire, Social Security outlays face an upward trajectory.
Social Security outlays totaled more than $1 trillion in 2019 (estimated), for about 5% of GDP. The CBO predicts an increase in Social Security outlays of up to $1.8 trillion in 2029, which would amount to roughly 6% of projected GDP (see chart).
There’s a school of thought that deficits were deliberately created by politicians who want to use budgetary shortfalls as an excuse to slash popular social programs. But motives are beside the point. Social Security is under siege. Period.
Slashing the safety net…
Social Security is a pay-as-you-go system. It probably won’t go “broke” as the alarmists claim. But the politicians in Washington just can’t keep their hands off your money. And yes, it’s your money. After all, Social Security contributions are deducted from each paycheck.
Certain lawmakers in Congress continually clamor for Social Security cuts, with Tuesday’s data on the federal deficit giving them new ammunition. GOP Senate Leader Mitch McConnell recently stated that his single biggest regret as leader has been his lack of success in curtailing Social Security. Last week, the White House opened the door to cuts in the program, saying it was a priority for the administration.
The foes of Social Security are persistent and they won’t quit trying, regardless of which party is in power. The most discussed curtailment of Social Security involves raising the retirement dates for eligibility. 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. Privatization is a perennial political goal that, like a zombie, never really dies.
Stay invested in stocks…
What does all this 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.
With headline risks mounting, we’re facing pull-backs this year. However, if your portfolio is properly positioned, you can respond calmly to unexpected shocks.
You should rotate into stable companies that provide essential services that are consistently used regardless of market or economic conditions. The real estate and utilities sectors are prime examples and they’re appealing now. These dividend-payers provide growth, income and safety.
But it begs the question: which specific stocks? Click here for our “dividend map” of high-yielding gems.
I’m also keen on technology “disruptors” that are tapped into unstoppable trends. Standing out this year are the companies instrumental in the global implementation of ultra-fast 5G wireless technology. For our list of the best 5G stocks, download our special report.
Retirees can’t count on the government, but they can still count on stocks. 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 retirement investing? Drop me a line: firstname.lastname@example.org
John Persinos is the editorial director of Investing Daily.