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UBS Road to the midterm elections: The future of Social Security explained · UBS Trending

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  Hello everyone, and welcome to UBS Studios award winning series,
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  road to the election.
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  This time
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  around, with a focus on the upcoming midterm elections
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  here in the US. I'm Anthony Pastore.
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  Thanks for joining me once again.
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  As we discuss
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  what matters most at the intersection of policy and markets.
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  My guest for this conversation
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  today is Andrew Dubinsky, senior economist at UBS.
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  Within our chief investment office.
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  Andrew, thanks for joining me.
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  Good time for you to be here
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  because we just released our most recent publication
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  for the Election Watch series that we do,
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  which this is a part of, but this one is about Social Security,
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  which we pulled you in and said, you're getting questions.
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  There are a lot of questions out there
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  about what it what it means, because there are,
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  as we just talked about,
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  there are a lot of misconceptions about Social Security.
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  People think that when you say it's going insolvent,
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  that there is going to be $0 left
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  and that Social Security is going to just go away,
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  maybe you can clear up before we even get into the what and the
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  how and the why is what's going on, and clear up
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  those misconceptions
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  about the Social Security issue that we're potentially facing.
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  Right? Yeah.
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  So
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  Social Security is a benefit program
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  many people are familiar with.
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  It's designed as a pay as you go system.
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  So people that are working,
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  they pay payroll taxes along with their employer.
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  And the beneficiaries are getting a benefit
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  that was based on their work history.
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  And in good times, those payroll taxes exceed what's going out.
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  And you have an accumulation that went to a trust fund.
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  And what's happening now is as the population's aging,
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  we're getting a lot more outflows than inflows in that trust fund,
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  which had built up, over many years of surpluses, is likely
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  to become insolvent around 2032, based on the latest estimates.
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  And what will happen then based under the way the programs design
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  is that
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  there'll be an automatic benefit cut down to the money
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  that's coming in.
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  And based on the current estimates, that could be around a 22%
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  benefit cut.
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  So people will still get, payments.
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  If there's no you know, interventions.
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  So it's not going to zero.
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  But it's certainly a big benefit cut for people,
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  for seniors and many of them, you know,
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  highly reliant on this source of income. Right.
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  So insolvent does not mean zero.
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  It just means a cut to what the benefits would be today.
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  Like you said, up to around 22% potentially
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  if no action is taken.
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  Yeah.
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  The cuts this going down to the money that's coming in
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  based on the current workforce.
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  And just how much wages people are making
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  and the formula applied to those wages.
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  So if the economy's doing really well,
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  maybe the benefit cuts could be a little bit smaller, but
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  there's just a large population of beneficiaries.
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  So it's,
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  you know, fairly like there would be a benefit cut
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  without some intervention. Right.
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  So I mean, this is not the first time
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  this has happened in US history.
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  In 1983,
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  President Reagan
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  at the time worked with Congress to come up
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  with a bipartisan deal to fund or fix the issue.
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  And here we are
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  now, all these years later, and it's coming up again.
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  But what's the difference between then and now?
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  Why can't we just do what they did then to fix the problem today?
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  Yeah.
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  So there's a lot of similarities to that point in time.
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  The fund was about to become insolvent.
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  And there was actually a lot more uncertainty about
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  what could happen to those payments.
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  And so
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  what's different then is I think there's a bit more,
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  focus on using, cuts to benefits as part of the solution.
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  So they used at the time,
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  a mix of, you know, increases to revenue,
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  but they also did things like raise the retirement age over time,
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  they delayed the COLA, which, allow for some savings.
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  And they did some other things
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  which, weakened the benefits for some,
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  employees and employees that had benefits elsewhere.
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  So there's a lot more focus on getting some savings from cuts.
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  Right.
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  And it's interesting because, you know, when
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  you look at the upcoming midterm elections,
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  which this series is focused on.
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  The senators that will be potentially voted in
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  or stay in their seats, they are likely going to be there in 2032
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  when this insolvency problem really kind of rears its ugly head.
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  So it's really important to kind of understand if.
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  And I'll go back to what you discovered,
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  which is when Americans were polled, most of them said they'd
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  rather see tax increases than benefit cuts.
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  So you've got to look at who's running in your state,
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  for Senate
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  and for the House and figure out what are their platforms
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  when it comes to Social Security,
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  because that seems to be
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  a really important question
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  that we need to be asking our local politicians is,
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  what are you going to do about this potential insolvency issue?
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  So and that's really where we are at this point
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  when it comes down to the policy of it.
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  Yeah, no, I agree.
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  So when you look, when we look at the battleground states,
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  for senators who will likely have to face this problem
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  and probably could really heat up
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  in 20 around the next presidential election.
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  As we get closer to that deadline, we can already,
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  see a little bit of a foreshadowing
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  of the policies
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  that they're putting forward to help fix the problem.
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  And there's definitely a lot more focus on,
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  expanding the payroll tax, either, you know, raising the cap.
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  Right now, it's around 185,000.
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  Or, you know, raising the payroll tax itself.
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  It's so there's a lot more focus on
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  changing the revenues as opposed changing the benefits.
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  And that's if, you know, the momentum we've seen,
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  with expanding benefits, it's been in place
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  for the past few years.
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  President Trump talked about protecting, benefits.
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  And he, introduced a tax deduction for Social Security.
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  So the recent momentum
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  has really been about protecting
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  and even expanding the benefits in some way.
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  And we see that with the, the current senators that are running.
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  And I think that tells us the direction of policy
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  probably the next couple of years. Yeah.
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  And hopefully,
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  like happened in 1983, there will be bipartisan support
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  because, you know, there is a lot of divisiveness,
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  as always, has been and continues to be
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  when it comes to policy and politics,
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  but hopefully especially with this issue,
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  which it is, because it is so important to every single American
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  who pays into the Social Security system,
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  which I've been doing
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  since I'm 11 years old and had a paper route, you know, so
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  and it was a small chunk of that.
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  But, you know,
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  I've been paying into the system
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  as all of our colleagues and coworkers
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  have, and family members and friends.
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  So here's sort of the thing is,
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  because when you think about it from a markets perspective,
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  on the investment side,
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  this could lead to potentially different things
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  higher taxes, benefit deductions,
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  impacts to Treasury yields.
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  What should the markets and investors really be
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  thinking about or quote unquote, be concerned about
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  when it comes to this issue, whether they solve it or not?
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  Yeah.
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  So you raised a number of the things they'll be watching.
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  And I think part of it is just the competency of the politicians
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  to really, you know, deal with the issue.
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  So it will likely require bipartisanship.
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  And the question is, just
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  how close do we get to the deadline?
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  And we know it's going to likely require bipartisanship
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  because this is something that can't be used, can't use the,
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  special reconciliation process
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  that only requires, a majority.
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  So and we're going to see, you know, is there a focus on,
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  raising revenues, which has some economic effects?
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  Or will it be a focus on, cutting benefits,
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  which likely have a bigger economic drag
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  if we and if we obviously a close to that cliff,
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  there is a lot of uncertainty that would come around which people
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  possibly even spend it pulling back on spending ahead of that.
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  And the third way
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  they could manage
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  the solution is just by borrowing in the short term.
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  And that would signal to markets that,
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  the US government is really not,
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  doing
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  a good job of preemptively solving its problems.
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  And there's other fiscal issues around the corner.
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  And if they can't really address this one,
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  it would be a signal about how they would, face challenges,
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  addressing future ones. Right.
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  So those are the, those three,
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  whether the what path they go down will affect either the economy
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  or could affect, the bond market in terms of the credibility
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  that the US
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  has with preemptively solving
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  these problems before we really get to the cliff.
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  Yeah,
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  a lot of work ahead for not only the politicians in Washington,
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  but folks that are looking at this from the investment case
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  before I let you go, Andrew,
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  because there's always this
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  everything nowadays is tied to artificial intelligence
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  in one way or the other.
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  And there are some experts that have argued
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  that this particular problem can be solved
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  using forms of AI, because they argue that they add
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  to efficiencies,
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  help with cutting spending, and they're looking at
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  every nuanced detail.
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  Is that something that you see
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  as potentially supporting the efforts
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  to solve the insolvency problem,
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  or is this just sort of like an AI pipe dream
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  that people are hoping
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  that there'll be some magic pill to fix this issue?
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  So I definitely think there's truth that, faster growth
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  coming from the adoption of AI could be
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  a real, tailwind for the US fiscal health.
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  And there are some estimates that show if,
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  you know, to AI boost productivity by 1%, that could help reduce
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  the deficit
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  by, let's say, two percentage points over a decade or longer.
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  And the key issue is just the timing.
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  So I could definitely help people make more money
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  and higher wages leads to more payroll taxes.
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  But that insolvency timing is that
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  as soon as, say, 5 or 6 years away,
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  and those types of tailwinds from AI or other, call them
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  structural growth changes
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  where maybe we encourage people to have larger families,
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  those things help longer term solvency.
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  But we have this shorter term problem where the money coming in,
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  it's just not enough to pay the money that's going out.
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  And it's just on a different timeline. Right.
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  Yeah.
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  Lower birth rates
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  is also something
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  that is an issue because as fewer babies are being born,
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  there are fewer people
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  adding funds into the system
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  while our baby boomers are living longer, which is great.
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  But at the same time,
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  we have to make sure they have a livable,
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  you know, amount of money coming in. Yeah.
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  So it's kind of one of those catch 22s.
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  And and not all of us are leaving
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  and, you know, start adding to payroll taxes that soon.
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  Most people start adding a lot later.
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  My dad was like, get a job, learn now. You know, it's
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  but yes, absolutely.
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  And there's certainly a lot of conversations, many conversations
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  that will be had, up into this midterm election
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  and then after until we get to 2032,
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  hopefully with a solution in place.
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  Andrew, great reporting.
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  Really good stuff.
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  Thanks for all the work you do on this.
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  And looking forward to having you back again.
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  Likewise. Looking forward to it.
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  Good to see you, Andrew Dubinsky from the Chief Investment Office.
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  And thank you all for joining us.
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  There's a lot more information on the upcoming midterm elections
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  and, of course,
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  its potential impact to policy, markets,
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  and your portfolio at our website, ubs.com/electionwatch,
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  including the most recent publication with the article
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  that Andrew and I were just referring to
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  on this conversation on Social Security.
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  Plus, make sure to mark your calendars
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  for our special post-election coverage on the CIO monthly
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  livestream that will be taking place on Thursday, November 5th,
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  just two days after the midterm elections at 1:00 p.m.
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  eastern time.
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  Plus, we've got a lot more UBS and CIO content
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  on our websites, including podcasts and videos.
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  You can find that at ubs.com/views.
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  Thanks for joining us everybody.
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  We'll have another edition of Road
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  to the Midterm Elections coming up for you soon.
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  In the meantime from New York City I'm Anthony Pastore.
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  Have a great day. See you soon.