The hidden cost of saving the economy

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Social Security has been a testament to the inability of a government to effectively manage anything. The debacle that we are facing with the projected shortfalls in the trust funds, which have been talked about for decades, is now just six years away. Such a short time for such a massive investment fund means the fund is in survival mode now!

Decisions not made by prior administrations and the public’s inability to hold government accountable are about to come crashing in monumental way. The most difficult decisions in leadership are seldom between right and wrong. They are usually between two imperfect alternatives.

Leaders choose the course they believe will produce the greatest good while minimizing the greatest harm. Only years later do history and experience reveal consequences few could have anticipated. The true measure of stewardship is whether we are willing to recognize those unintended consequences, learn from them, and make the next decision wiser than the last.

Social Security deserves nothing less. We, the people, were forcefully committed to investing in Social Security. Decades of deposits were made from every paycheck. We did our part to participate, willing to or not.

Every payday, money was deposited. Every year, you expected those savings to earn a reasonable return. You weren’t looking to get rich. You simply trusted that your retirement would be managed responsibly. That expectation is enforced by regulators with investment fund managers but not with Social Security.

In 2008 and 2009, the U.S. economy was whipsawed by the Great Recession, the Federal Reserve responded with a program of quantitative easing that dropped interest rates to near zero levels for over a decade. That decision, which affected Social Security investments, which are restricted to U.S. government securities, devastated the fund’s earnings every year for over 15 years now.

Every financial decision has a cost. Almost always, the people who pay that cost are not the ones who made the decision.

Following the financial crisis of 2008, the Federal Reserve faced one of the greatest economic challenges in modern American history. Banks were failing. Credit markets were freezing. Millions of jobs were at risk. Policymakers had to make extraordinarily difficult decisions with incomplete information while financial markets deteriorated around them.

Reasonable people can debate whether quantitative easing was the best response. Historians and economists undoubtedly will for decades.

What happens when one allegedly well intended solution quietly creates another problem that almost no one notices or cares until it is almost too late?

Quantitative easing was designed to stabilize financial markets and lower borrowing costs throughout the economy. By purchasing large amounts of Treasury securities and mortgage-backed securities, the Federal Reserve pushed interest rates to historically low levels. Those lower rates helped businesses borrow, encouraged investment, supported housing markets, and contributed to economic recovery.

Certificates of deposit that once earned meaningful returns paid almost nothing. Savings accounts generated little income. Retirees who depended upon interest from conservative investments suddenly found themselves earning far less than they had planned.

Many adjusted to the new reality by postponing retirement and reducing spending or curtailing their lifestyle. Many lost their homes.

What few people realized was that the Social Security Trust Fund was experiencing something remarkably similar with no legislative authority to stop the hemorrhage for more than 10 years.

Unlike virtually every major public or private pension system in America, the Social Security Trust Fund is required by law to invest exclusively in special-issue United States Treasury securities. That investment policy was designed decades ago to maximize safety.

It also meant the Trust Fund had no opportunity to diversify its investments when interest rates fell to historic lows. Its trustees had no discretion. They could not seek higher long-term returns. They could only invest as Congress had directed. As Treasury yields declined, so did the earnings credited to the Trust Fund. No one intended to reduce Social Security’s investment income but that was precisely what happened.

The Federal Reserve was not managing Social Security. It was managing monetary policy for the nation’s economy and yet the consequences extended well beyond financial markets. Over time, those lower investment returns reduced the growth of the Trust Fund by an amount that many analysts estimate in the trillions of dollars.

This is an accounting and economic reality.

Throughout my career as a CPA, a legislator, and later a trustee of one of the nation’s largest public pension systems, I learned that most financial problems are not created by bad people, although that does happen. They are created by good people trying to solve extraordinarily difficult problems without fully understanding the unintended consequences or accountability for those solutions.

The real question is whether we are willing to learn from the consequences we never intended. That principle should guide today’s discussion about Social Security.

For years, we have been told that the only choices are higher taxes, lower benefits, or a later retirement age. But before asking workers and retirees — people who faithfully paid every payroll tax required of them — to shoulder additional burdens, shouldn’t we first examine whether the structure of the Trust Fund itself contributed to today’s challenges?

Shouldn’t we ask whether requiring every dollar to remain invested in a single class of government securities continues to represent the best stewardship of the American workers’ retirement contributions? Those are not political questions but fiduciary questions.

Social Security has become one of the most successful social insurance programs in American history because generations of workers kept their promises. They went to work. They paid their payroll taxes. They trusted that the system would be responsibly managed and it was not. Social Security became a weapon in the arsenal of monetary policy and not a financially prudent investment decision. The system was designed with a massive flaw from the onset, and it must be fixed if it is too survive.

And that is how we preserve Social Security: by becoming better stewards of its future, and not punishing those who did nothing wrong.

Frank Ryan is a CPA, retired U.S. Marine Corps Reserve Colonel, former member of the Pennsylvania House of Representatives, and former vice chair of the Pennsylvania Public School Employees’ Retirement System (PSERS).

Image: pasja1000 via Pixabay, Pixabay License.