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Policy, Politics & Portfolios

Updates and analysis from Wells Fargo Investment Institute on what federal budget, regulatory, and trade decisions could mean for investors.


Social Security cost-of-living increase — Is it enough?

The 5.9% Social Security cost-of-living adjustment this year was the largest increase since 1982. A 5.9% rise may sound large, but with inflation rising faster, can it offset price hikes for items that generally matter most to consumers, like food or gas?

Key takeaways

  • The cost-of-living adjustment (COLA) for Social Security recipients increased 5.9% in 2022.
  • Current projections show the Social Security trust can cover full benefits through 2034 before facing a shortfall.
  • Investors looking to supplement their income might consider adding fixed-income assets or high-quality, large-cap stocks that pay dividends.

Eroding spending power

Congress enacted the COLA provision in 1972; automatic COLA adjustments began in 1975. The average monthly Social Security benefit for retirees in 2022 rose to $1,657.30 from $1,565.00.  Source: The Senior Citizens League, May 2022

Social Security and Supplemental Security Income benefits for roughly 70 million Americans increased 5.9% in 2022. Today, Social Security is a primary income source for roughly 65 million U.S. retirees.1 Yet, rising inflation is eroding consumers’ spending power, particularly for those who are living on a fixed income. The more one’s income depends on a Social Security check to meet monthly expenses, the greater today’s elevated inflation rates erode household budgets.

Presumably, higher inflation rates today could lead to larger Social Security cost-of-living adjustment (COLA) increases tomorrow. A 5.9% increase may sound large, but with inflation rising at a faster clip, can it realistically offset price hikes for items that affect most U.S. consumers — food, gasoline, housing, and health care? More broadly, as some market observers call the solvency of Social Security into question, what are the financial implications of potentially heftier COLA adjustments for the federal budget deficit and the long-term viability of the program?

COLA and consumer prices

The 5.9% COLA increase this year was the largest annual increase since 1982. A COLA adjustment is determined by the percentage increase in the Consumer Price Index (CPI) for urban wage earners and clerical workers (CPI-W) from the third quarter of the previous year to the third quarter of the current year. If there is no increase in CPI, there is no COLA adjustment. COLA increases aim to prevent inflation from eroding the purchasing power of Social Security benefits.

The May CPI data showed that prices overall rose 8.6% year over year. Yet, goods that generally matter most for consumers have seen even greater price increases. Since May 2021, gas prices have risen 50.3% and food prices have soared 11.9%, a rate not seen since the 1970s.2 Further, the cost of the standard Medicare Part B premium increased 14.5% for 2022. Persistently high inflation this year could lead to a larger COLA increase next year, prompting concerns about the sustainability of Social Security.

Solvency of Social Security

Social Security program benefits are primarily funded by payroll taxes collected from current workers. During the past three decades, the Social Security trust has accumulated $2.8 trillion in reserves.3 Over that period, income exceeded costs, and the surplus was invested in interest-bearing Treasury bonds. Looking ahead, as outlays increase, the reserves will cover gaps between revenue and costs for about another decade.4

Despite the economic upheaval caused by the COVID-19 pandemic, the long-term outlook for Social Security deteriorated only modestly from last year, pushing the potential date of insolvency up from 2035 to 2034. The loss of payroll tax revenue was partially offset by the reduction in beneficiaries who succumbed to COVID-19. Current projections show that the trust can cover full benefits through 2034 before facing a shortfall. The gap as it stands now would amount to 1.2% of U.S. gross domestic product (GDP) over the subsequent 75 years.5

Chart 1. Cost-of-living adjustments (1975 – 2021)The chart shows cost-of-living adjustments for Social Security from 1975 through 2021. In 1975, the adjustment was 8%. After a slight decrease for a few years to 6%, it spiked above 14% in 1980. The adjustments dropped off dramatically for a few years after and then mainly fluctuated between 2% and 4% with occasional spikes and dips through 2021.Sources: Social Security Administration and Wells Fargo Investment Institute, June 10, 2022

Economic and investment implications

Come 2034, Social Security seems likely to continue to be available. Although 2034 is the projected date for depletion of excess contributions in the Social Security trust, barring no action the program could still pay 78% of scheduled benefits for 75 years beyond that, mainly from workers’ ongoing contributions.6 Nevertheless, even if inflation peaks in the coming months, as we expect, high prices are likely to remain sticky well into 2023. With costs of household staples (food, gas, and housing) rising, many households are likely to feel further squeezed.

Investors looking to supplement Social Security checks might consider adjusting portfolios in an effort to increase income. This may include adding fixed-income assets. We currently favor U.S. taxable investment-grade short-term fixed income, U.S. taxable investment-grade intermediate-term fixed income, and municipal bonds. For income-seeking investors, we also suggest higher-quality, large-cap stocks that pay dividends. Additionally, we favor using alternative investments as a way to generate non-correlated (in other words, not correlated to the broad equity markets) returns with stable yields.

Alternative investments are not appropriate for all investors and are only open to “accredited” or “qualified” investors within the meaning of U.S. securities laws.


Financing federal deficits and debt

Federal deficits and debt grab the headlines, but it’s the cost of paying interest on them that typically determines the impact of government finances on the financial market. The burden of servicing the government’s debt, suppressed in the past decade by ultralow interest rates, eventually could return to the spotlight as higher interest rates are applied to the government’s sizable debt load.

Key takeaways

  • The financing cost of government debt, not its size or budget shortfalls, ultimately has determined the market’s reaction to budget deficits and debt.
  • The U.S. Treasury’s ability to manage long-term increases in financing costs will likely affect Treasury interest rates and, as a risk-free benchmark for valuing other securities, conditions throughout the financial market.

Federal debt, deficits, and the investor: One size doesn’t fit all

The federal budget, along with housing and the bond market, are touchpoints of the economy’s heightened interest sensitivity as rates rise from ultralow levels in the past 15 years. Deficits and debt get much of the attention, but it’s their impact on government interest expense ultimately determining the market’s reaction to budget shortfalls. The last time the budget deficit was front-page news was in the early 1990s, when net interest expenses peaked at nearly 18.5% of revenues in fiscal 1991 (ending in September of that year) and debt amounted to less than 45% of GDP. Flash forward to fiscal 2021. The chart below shows that debt soared to nearly 103% of GDP. Investors have responded with little more than a wink and a nod, probably because the interest burden still is historically low at less than 9% of federal revenues.

Chart 2. Comparing federal debt and the financing burden to the early 1990s (fiscal years)This line chart shows the federal debt and financing burden since 1960. One line tracks the path of interest payments on federal debt as a share of government revenues back through fiscal year 1985 (ending in September). The other line illustrates federal debt as a percent of current-dollar gross domestic product (GDP). The dollar cost of federal debt, not its size, has coincided with market concern and complacency over federal finances since the early 1990s.Sources: U.S. Treasury Department, Congressional Budget Office forecast, and Wells Fargo Investment Institute calculations. FY = fiscal year. GDP = gross domestic product. Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

Cost trumps the federal debt’s size

Credit the decades-long decline in interest rates with suppressing the rise in debt-financing expenses since the early 1990s. Since 2000, the average interest rate on federal debt has fallen by 5 percentage points, to about 1.5%. More recently, tax revenues propelled by strong economic growth and accelerating inflation have combined with an increase in the average maturity of Treasury debt to a record of just over six years to hold the financing burden to its pre-pandemic level, as shown in Chart 2.

The Congressional Budget Office (CBO), in its May 2022 projections of federal deficits and debt, expected the government’s financing burden to remain low by historical standards in the next several years, and we shared this view in a report last year.7 However, the debt’s size can become an issue by exposing financing costs to unexpectedly large increases in interest rates.8

Taking the longer view

Lower interest rates have left the government’s financing burden at less than half its peak in 1991, even as the federal debt has doubled relative to gross domestic product (GDP); Deficit control has been made increasingly difficult by the growing share of debt service and mandatory spending in the budget, now at 80% of total spending.

The CBO shows in its forecast that even a moderate rise in interest rates could lift the financing burden near its peak level in the early 1990s by the end of the decade if current economic policies remain unchanged. Projected increases in government debt-servicing costs include refinancing of the 70% of privately held Treasury securities coming due in the next five years into higher-yielding debt and CBO estimates of widening budget deficits based on current economic policies.

We believe forecasted increases in the federal debt’s financing burden should be viewed less as inevitable than as a warning flag of the risk from persistent, outsized budget deficits. Interest expenses, once incurred, are the most uncontrollable expense in the federal budget. Atop rapidly growing and less controllable entitlements, that 80% share of total spending reduces fiscal flexibility and makes deficits more difficult to contain.

What it means for investors

We believe that the federal debt’s vulnerability will have more to do with the cost of borrowing than with default risk, which is more a political issue. For investors, the importance of Treasury financing costs extends beyond pricing in the market for government debt to its role as a risk-free asset used as a benchmark for valuing other debt securities and, ultimately, for equity valuations. For now, a low debt-servicing burden means that Treasury interest rates should be shaped largely by economic conditions. We believe those conditions, pointing toward moderate interest rate increases through 2023, support our favorable view toward U.S. Short Term Taxable Fixed Income and U.S. Intermediate Term Taxable Fixed Income and a neutral positioning on U.S. Long Term Taxable Fixed Income.

How big a longer-term role has for government finances in shaping Treasury interest rates will depend on the government’s ability to manage any future pressure on borrowing expenses effectively. Our report Paying America’s Bills, republished in October 2021, notes the risk of inaction on deficits and of financing costs but also outlines several different approaches the U.S. government can use to manage debt levels and their financing costs.9


Potential timeline for delisting Chinese stocks

China is resisting a U.S. law requiring U.S.-listed Chinese companies to undergo a full audit by U.S. regulators. The risk that the U.S. may delist Chinese companies is an additional headwind for emerging market equities, but ultimately we believe potential opportunities in emerging markets — and China specifically — will offset the regulatory and political hurdles.

Key takeaways

  • The U.S. and China are working to reach an agreement in which China would fully facilitate audit inspections.10
  • A possible work-around might be for China to voluntarily delist a subset of companies that it considers sensitive while bringing the remainder of firms into compliance with U.S. standards.
  • Regardless of how the HFCAA progresses, we continue to believe that its contribution to U.S.-China tensions will accelerate the transformation of globalization, not end it.

Increased risks of investing in U.S.-listed Chinese companies

The 2002 Sarbanes-Oxley Act after the collapse of Enron required all public companies be audited by the Public Companies Accounting Oversight Board (PCAOB). In late 2020, then-President Donald Trump signed the Holding Foreign Companies Accountable Act (HFCAA), a law that bans the trading of securities in foreign companies whose audit working papers can’t be inspected by U.S. regulators for three years in a row. The HFCAA took effect in 2021 and thus gives Beijing until spring 2024 to comply.

The core issue is whether China will allow the PCAOB to routinely inspect the auditors of U.S.-listed Chinese companies. China has long argued that unfettered access to the audit papers could threaten its national security.

U.S. regulators counter that Chinese companies enjoy the trading privileges of a market economy — including access to U.S. stock exchanges — while receiving Chinese government support and operating in an opaque system. Indeed, Chinese companies are attracted by the liquidity and deep investor base of U.S. capital markets, which offer access to a much bigger and less volatile pool of capital. China’s own markets, while giant, remain relatively underdeveloped.

Additional idiosyncratic factors will likely also have a significant impact on how the HFCAA unfolds:

  1. Proposed acceleration of HFCAA — Bills passed by both the U.S. House and Senate would shorten the deadline by a year. And there is a good chance that the accelerated timeline could be included in a more comprehensive China bill by the end of the year that aims to boost America’s competiveness against China.
  2. China regulations — Beijing regulators have cracked down on Chinese companies issuing securities overseas by enhancing data security protection and oversight of cross-border data flows. The Chinese government’s focus on data security for overseas-listed firms is underlined in rules from the Cyberspace Administration of China, which took effect February 2022 and require mandatory review for any company collecting personal information of more than 1 million users prior to listing abroad.
  3. Variable interest entities — The Securities and Exchange Commission (SEC) has been advocating that investors receive more information about the structure and risks associated with shell companies, known as variable interest entities, that Chinese companies use to list shares in New York.

Update on HFCAA and next phases

The U.S. Securities and Exchange Commission (SEC) has identified more than 135 Chinese companies listed on U.S. exchanges that it deems “non-compliant.”

Since March, the SEC has “identified” more than 135 companies that relied on auditors headquartered in mainland China and Hong Kong, which the SEC deems “non-compliant” by the PCAOB, for their fiscal year 2021 annual report filings. Under the HFCAA, companies so-identified by the SEC in 2022 are on track to become subject to a securities trading ban and probable delisting from U.S. exchanges by 2024.

The PCAOB and Chinese regulators appear to be actively negotiating an agreement on the PCAOB’s access to audit firms based in mainland China and Hong Kong.11 A possible work-around might be for China to voluntarily delist a subset of companies that it considers sensitive while bringing the remainder of firms into compliance with U.S. standards.12 In the meantime, some Chinese companies are repositioning themselves with dual listings or take-private deals and others are seeking out U.S.-based auditors.

What it means for investors

In response to uncertainties surrounding HFCAA, some shareholders have opted to exchange their American depositary receipts (ADRs) in Chinese companies for shares that trade on Hong Kong’s stock exchange. Capital flows have already started to move into Hong Kong. For example, the MSCI China Index swapped out of the ADRs of Alibaba Group Holding Ltd., Inc., and NetEase Inc. last year for these companies’ Hong Kong listings.

The potential for certain China companies to be delisted from U.S. exchanges also adds risk to their shares and the emerging market asset class overall, which has already been plagued by China’s regulatory crackdowns and pandemic-related shutdowns in major cities such as Shanghai. Case and point, a move by the SEC in March toward forcing companies from China off American exchanges helped trigger the worst decline in U.S.-listed Chinese stocks since the global financial crisis and sparked a sell-off in Hong Kong.

We see HFCAA contributing to U.S.-China economic and political tensions, along with issues such as trade tariffs and disagreements over the Russia-Ukraine war. Looking ahead, however, we continue to expect new investment opportunities over the coming decade as China develops a private sector to serve its 1.4 billion consumers. As with these other issues, HFCAA is likely to contribute to the ongoing development (not the end) of globalization.

Ultimately, we believe potential opportunities in emerging markets — and China specifically — will offset the regulatory and political hurdles. For investors interested in potential opportunities in China, or in the emerging economies of South Asia that trade with China, we suggest considering passive global funds, active managers, and U.S. or European multinationals. We describe these investment vehicles and the potential opportunities we expect during the next decade in our September 2021 report “The Future of Globalization: Investing in an Interconnected World.”


1 The Senior Citizens League, May 2022

2 U.S. Bureau of Labor Statistics, June 10, 2022

3 Congressional Budget Office, May 2022

4 Center on Budget and Policy Priorities, September 28, 2021

5 Ibid.

6 Ibid.

7 “Paying America’s Bills: What Investors Should Know About How the U.S. Government Manages Its Finances,” Wells Fargo Investment Institute, October 2021; “Rising Rates and the National Debt: Should We Worry?” Wells Fargo Economics, May 31, 2022

8 “The Budget and Economic Outlook: 2022 to 2032,” CBO, May 25, 2022

9 “Paying America’s Bills: What Investors Should Know About How the U.S. Government Manages Its Finances,” Wells Fargo Investment Institute, October 2021

10 “U.S.-listed Chinese Stocks Jump After China Reportedly Considers Sharing Company Audits,” CNBC, Hannah Miao, April 1, 2022

11 “Navigating the Holding Foreign Companies Accountable Act – The Road to Delisting or Redemption for China-based Companies,” Akin Gump, May 16, 2022

12 “China Faces Growing Pressure to Iron Out Audit Deal With the U.S.,” Wall Street Journal, Jing Yang and Paul Kiernan, May 24, 2022

Risk considerations

Forecasts and targets are based on certain assumptions and on views of market and economic conditions which are subject to change.

Different investments offer different levels of potential return and market risk. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Equity securities are subject to market risk which means their value may fluctuate in response to general economic and market conditions and the perception of individual issuers. Investments in equity securities are generally more volatile than other types of securities. There is no guarantee that dividend-paying stocks will return more than the overall stock market. Dividends are not guaranteed and are subject to change or elimination. Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility. These risks are heightened in emerging markets. Bonds are subject to market, interest rate, price, credit/default, liquidity, inflation and other risks. Prices tend to be inversely affected by changes in interest rates. Municipal bonds offer interest payments exempt from federal taxes, and potentially state and local income taxes. These bonds are subject to interest rate and credit/default risk and potentially the Alternative Minimum Tax (AMT). Quality varies widely depending on the specific issuer. Municipal securities are also subject to legislative and regulatory risk which is the risk that a change in the tax code could affect the value of taxable or tax-exempt interest income.

Alternative investments, such as hedge funds, private equity/private debt and private real estate funds, are speculative and involve a high degree of risk that is appropriate only for those investors who have the financial sophistication and expertise to evaluate the merits and risks of an investment in a fund and for which the fund does not represent a complete investment program. They entail significant risks that can include losses due to leveraging or other speculative investment practices, lack of liquidity, volatility of returns, restrictions on transferring interests in a fund, potential lack of diversification, absence and/or delay of information regarding valuations and pricing, complex tax structures and delays in tax reporting, less regulation and higher fees than mutual funds. Hedge fund, private equity, private debt and private real estate fund investing involves other material risks including capital loss and the loss of the entire amount invested. A fund's offering documents should be carefully reviewed prior to investing.


MSCI China Index captures large and mid-cap representation across China H shares, B shares, Red Chips and P Chips. With 140 constituents, the index covers about 85% of the China equity universe

An index is unmanaged and not available for direct investment.

Note: MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

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