Comment: Social Security shield we need from volatile markets

By Kathryn Anne Edwards / Bloomberg Opinion

This month’s roller-coaster ride through the markets has been more frightening than exhilarating for many Americans, who have more than $44 trillion invested in retirement accounts. As a result, the internet has been flooded with financial advice, most of it saying some version of “Don’t panic.”

What almost all this advice is missing is a reminder that every working American has insurance coverage for exactly this type of situation. Saving for retirement has inherent risks, and losing money on investments (or losing money at the wrong time) is just one of them. Luckily, this insurance coverage has an enviable track record and provides nearly all policy holders a minimum level of economic security and independence in old age.

It’s a government plan called Old Age Insurance, better known by the umbrella program it falls under: Social Security. And during times like these, it’s reassuring to know that it is not an investment, should not be an investment, and serves its purpose extremely well.

In terms of insurance, Social Security is the most valuable policy most people hold. Workers pay premiums via a payroll tax on earnings (6.2% up to a cap, matched by employers) to gain coverage for themselves, their spouses and their dependent children. It protects against three risks: dying, becoming too disabled to work, or becoming too old to work. Benefits for children last until they come of age, while benefits for spouses or workers are for life and are adjusted for inflation.

The amount of the benefit is based on one input and one input only: how much the worker earned. Social Security benefits are insulated from whatever turmoil besets the broader economy or market.

Consider the 2008-09 recession. By the end of 2009, after the economy had shed 8.6 million jobs over the previous two years, some 15 million Americans were unemployed. The stock market, which was still struggling from the dot-com bust several years earlier, declined 50 percent, capping off a “lost decade” of zero total returns.

During this period, Social Security didn’t miss a payment, didn’t reduce benefits, didn’t deny benefits and didn’t delay benefits. In fact, during this recession, poverty among the elderly actually fell.

For decades, Social Security’s detractors have argued that the program’s lack of market investment fails workers by robbing them of a higher return. They say the program would generate more income if tax contributions were invested. And there are many people out there — I hear from them whenever I write or post a video about Social Security — who think they could make more for their retirement if, instead of paying a tax on their earnings, they were allowed to invest that money instead.

These criticisms misunderstand the purpose of Social Security. If an investment in the stock market underperforms or fails, people still have Social Security. The market is for generating returns. Social Security is for protecting against losses. They each have a job to do.

If anything, that $44 trillion in investment is proof positive that Social Security by no means prevents Americans from putting their retirement savings in the stock market. And if more workers want access to the market, that’s an issue to take up with employers: More than 40 percent of full-time workers lack an employer-provided retirement plan.

That’s one reason a bipartisan group of lawmakers in Congress has proposed establishing a portable, tax-advantaged retirement account for all workers. This can be done without touching Social Security. (The Washington state Legislature last year established the Washington Saves Retirement Program. Starting in 2027, it will automatically enroll all workers 18 and older not already in an employer-sponsored plan, in a state IRA plan, with the ability to opt out.)

For all the talk about the glories of investing in the market, the income of the elderly population offers a sobering reminder. Social Security is about half of income for about half of retirees. That share rises as people get older and deplete their savings.

The recent market volatility is a timely reminder of what Social Security is designed to be insulated from; and should motivate Congress to address the program’s long-term shortfall. After all, Social Security gave Congress a nearly 45-year advance warning: The program spent almost three decades (1983-2010) taking in reserves to build up a 25-year, $3 trillion cushion that delays its shortfall to 2035.

Social Security is insurance against risk. That risk is palpable for many, especially given this month’s events. Congress can’t control the stock market. It can’t guarantee returns on investment. All it can do is ensure that the protection Americans paid for is there for them when they need it.