The Sustainability of Social Security: Cause for Concern?
Social Security, established in 1935, provides financial benefits to the elderly, disabled, and disadvantaged groups. However, there are concerns regarding its sustainability. Social Security is particularly concerning among younger generations who are not yet receiving benefits and must continue paying SSI taxes despite their future benefits being reduced or, at worst, discontinued.
So, should you be concerned about the state of Social Security? The answer, while multifaceted, tends to lean toward the affirmative.
Reasons for Concern
There are several reasons for concern about Social Security's sustainability.
- Demographic changes: The number of baby boomers born between 1946 and 1964 are reaching retirement age, and their numbers are significant. As they draw Social Security retirement benefits, fewer workers contribute to the program, straining the system's financial resources.
- Longer lifespans: Due to advancements in healthcare and technology, people are living longer than ever. While longer lifespans are a positive development, they also mean that individuals draw upon Social Security benefits for extended periods. This increased longevity, combined with the influx of retiring baby boomers, puts increasing pressure on an already burdened Social Security system.
- Economic climate: The current economic climate further complicates the issue. Economic uncertainties and lower interest rates have resulted in lower returns on investments that form a substantial part of the Social Security trust fund. The Congressional Budget Office predicts that the fund's reserves could be depleted by 2034 without action.
Social Security Reform & Politics
Reforms are being proposed to help work toward its continuation. These include increasing the retirement age, changing the formula used for benefit calculations, raising the payroll tax cap, or combining these measures.
However, the political division surrounding the issue complicates reform efforts. Social Security has long been an issue in American politics, but little progress has occurred despite the looming crisis. This political gridlock should also concern the American people.
Preparedness Is Critical
While Social Security is not on the verge of immediate failure, its long-term prospects without substantial reform are worrying. The pressing question for citizens and policymakers alike is not whether we should be concerned about Social Security but rather what can be done to help its survival and effectiveness in providing financial support as intended.
Let's Team Up
The issue of Social Security being available for future generations requires attention. Future generations face later benefits start ages and a reduced benefit amount compared to those already receiving benefits. Therefore, working with a financial professional to devise a plan for retirement income without Social Security benefits is vital.
Known for its notoriously strict borrowing laws, Germany's new fiscal spending package has the potential to transform both the country and the broader European Union in the coming decade. The package was proposed as a response to the uncertain future of the long-standing implicit security blanket from the U.S., featuring over €1 trillion in new defense and infrastructure spending. If enacted, it would be the largest fiscal stimulus the country has seen since post-Cold War reunification.
Specifically, the plan includes: (i) reforms to the country’s “debt brake” with all defense spending above 1% of GDP excluded from the debt limit calculation; (ii) the creation of a €500 billion fund to invest in Germany’s ailing infrastructure over 10 years; (iii) and an extension of the 0.35% debt brake limit to state budgets. Not only does this package have the potential to kick start Germany’s economy out of a two-year recession, but it also shows a commitment to rearming its military after years of lackluster investment. While structural changes to Germany’s tax code and regulatory body may still be necessary, the benefits are likely to spread throughout the EU.
For investors, this package has substantial implications for European markets, particularly if other countries decide to loosen their fiscal policies. If appropriated wisely, these large increases in government spending can lead to positive long-term growth effects. While bonds could underperform in the face of increased debt issuances and higher borrowing costs, European equities are well positioned to reap the rewards. Already up 16+% this year, with notable outperformance in defense and industrial stocks, the rise in European equities could be a longer-term trend in this new environment.
Chart of the Week: Source: Congressional Budget Office, Goldman Sachs Global Investment Research, HM Treasury, Stockholm International Peace Research Institute, J.P. Morgan Asset Management.
Thought of the Week: Source: Reuters, Wall Street Journal, J.P. Morgan Asset Management.
Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally
Adjusted Annual Rate
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Bond Returns: All returns represent total return. Index: Bloomberg US Aggregate; provided by: Bloomberg Capital. Index: Bloomberg Investment Grade Credit; provided by: Bloomberg Capital. Index: Bloomberg Municipal Bond 10 Yr; provided by: Blomberg Capital. Index: Bloomberg Capital High Yield Index; provided by: Bloomberg Capital.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Commodities: Gold, FactSet; Crude Oil (WTI), FactSet; Gasoline, FactSet; Natural Gas, FactSet; Silver, FactSet; Copper, FactSet; Corn, FactSet. Bloomberg Commodity Index (BBG Idx), Bloomberg Finance L.P.
information from FactSet's Pricing database as provided by MSCI. Russell 1000 Value Index,
Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R,
top to bottomare: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stockmarket, and
is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures
the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell
2000 companies with higher price-to-book ratios and higher forecasted growth values).
Past performance does not guarantee future results.
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