Social Security Retirement Trust

In listening to the rhetoric about the President’s privatizing a percentage of Social Security, one hears widely divergent views of the problem. One blogger wrote asking, if they want to invest in stocks, the Social Security Trust Fund managed by the Department of the Treasury needs merely to invest a portion of the Trust Fund in one of the market index instruments. He further asks why anybody would want the expense of all those small private accounts. Indeed, something is missing. Where is the money?

Do a little research. See for yourself. If you go to the Social Security Administration Website, the first thing you find under investment fund is the statement that the funds are divided between: 1 Special Issue – Securities, available only to the trust fund, and 2 Public Issue – Securities, available to the public (Marketable Securities) --- The next thing you read, there are no Public Issue Securities. The Special Issue – Security pays a very low interest set by formula favorable to the borrower, not the worker. The money is paid out to retirees with the funds deposited by younger workers. The surplus cash flow goes into the governments general fund of operations and the Social Security Trustees are given these non negotiable Special Issue certificates of indebtedness and SI Bonds, low interest, likewise non negotiable. In other words, we spent it and stuck an IOU in the Piggy Bank. There is no Trust Fund. I don’t think you can bankrupt that which does not exist. The fund is not on the verge of bankruptcy, it is bankrupt, but no one on either side of the isle wants to explain it to the public. Therefore, what we get is political rhetoric from both parties. Both are politically correct from their own viewpoint but say nothing of the truth.

If you look at the page with the graph of Income, Outgo and Assets, on the other hand you find a nice graph showing income in green, fluctuating substantially above the payout, blue line. Likewise, the green Asset line curves upwards in a gentle parabolic, uncluttered by liability. Not everything is what it might seem. The graph begs the obvious. The retirees were paid. There was money left over. What was left over, however, was spent. The Asset accumulation curve is unreal in that it represents non-negotiable IOUs from the administration to the administration, a shell game or Ponzi scheme. True, we are able to pay out because of the large numbers of young contributors. It works so long as the government does not have to pay back the IOUs, and so long as young workers outnumber retirees, but that is changing. It is catching up with us. Actuarially the Fund is already in a deep deficit. If this were an insurance company, it would be all over. Looking further the annual cost of Social Security is 4.3% of GDP, that’s 0.5 trillion. By 2078, it will be 6.6% of GDP per year! (That will be a zillion :) The report goes on to say that the actuarial deficit right now amounts to 1.89% of the total National Taxable Income. That amounts to 0.13 trillion annually.

It would take 15% increase in FICA to break even right now and that figure might have to be revised upwards in the future. Furthermore, the report suggests that every year we wait the reckoning gets much tougher. So, what exactly is the problem? Let’s hope we learn tomorrow from Dr. Greenspan. I think politicians from both sides have depended on the FICA revenue for so long in balancing their budgets (Another shell game) that neither has the courage to own what went on and begin to fund the program. Sure there are all those IOUs but that just means the program will have to be funded with tax dollars. You guessed it. There are not enough tax dollars. (0.5t / year out of a 2t budget; no way) Some claim that funding on the scale proposed would cost us revenue that we cannot afford or that the funding represents a further expense of 2t. Not so, there is no longer a surplus for the administration to allocate to the general fund (nothing left to pilfer from the Piggy Bank) The younger workers contribution no longer covers the obligated payments to retirees. If the obligations had been even partially funded and invested in a responsible manner, such as with the Alaska Permanent Fund, there would not be a problem now. Partial funding now will require the Administration to allocate real dollars. Doing so will add to the National Debt but will reduce the IOUs by an equal amount, so that part is a wash. The fact that in doing so, a portion of the obligation will be funded can only be a plus.

So, what can be done about it? It would be nice if the funding of the Trust could start out on a small enough scale that the impact on the government bond auction does not result in higher interest rates. Then, with time, one might hope for exponential growth in the economy to cover the trail. The actuarial commitment of Social Security is likely to be met one way or another, either by reducing the retirement benefit or paying it with Federal Taxes. Alternatively, we could have induced inflation. Either we gradually fund the plan or pay out of tax dollars as we go. The later results in unsustainable increases in taxation, so we are left with reduced benefits or the tough choice of funding. Whether it comes from private or government funding it makes little difference. So far government has shown neither the will nor the way however.

If the money had been saved and not spent in the first place, the invested funds might realistically have earned enough to accommodate the increased numbers of seniors and the proportionally smaller ratio of workers, who keep Social Security alive.

Keeping the process in the Treasury Department seems appealing because of the fear factor of commercial investment funds and personal ownership. Considering the large percentage of persons who by human nature might waste their retirement, individual funds would need to be highly restricted without option of withdrawal. Some guarantee of principal might be feasible as well. I hardly see the Security and Exchange Commission, however, doing worse than the Trustees under the Treasury Department have done in allowing Social Security to go unfunded. The Trustees are either cabinet members or appointees of the President with the approval of Congress so each administration has been able to pretty much have its way with the Trust Fund.

The advantages to funding, and I think that is the real issue, lies in investment growth and stimulation to the economy. By comparison, tax money does neither. It seems cynical that senior citizens should pay higher taxes in order to pay themselves their own Social Security checks. I would bet that the taxes paid in such an eventuality would be greater than the amount on the checks received.

An undeniable advantage, in the case of the proposal, to the young worker results from the funded retirement appearing on his or her personal financial statement. Under the present system, there is no asset, no fund, only non-negotiable IOUs and liabilities for future obligation. If one were to look at the picture optimistically, one might picture a post Iraq War economic boom that would pay handsome dividends to the adventuresome young workers who did elect to pay into an Investment Fund. Success breads success. A clamor for more of the same could result in Legislators finding the will and the way to actually fund Social Security. I do not think legislators of either persuasion, at present, have the political will to do anything. The price of doing nothing will be extraordinary in a few years. Anything may be better than the comic charade that is played out in Social Security as it now stands. The administration deserves credit for at least trying. One could also hope optimistically that the elected personal funding would stimulate enough extra GDP (We’ll pass them out like hamburgers) to replace the lost illicit FICA revenue with the resulting increased tax revenue.