Wednesday, November 20, 2013

The Social Security Trust Fund surplus was never going to be locked untouched in a vault

 - by New Deal democrat

[Note: I think Bonddad is overwhelmed with work this week. I should have a nerdy post up at XE later today or tomorrow, and of course I'll link.  In the meantime, let me continue to follow up on Monday's post.]

My post Monday was picked up by Doug Short and posted at his investment site, where it got a very different readership from here.  One of the readers contacted me, and repeated the claim that the Social Security Trust Fund is fictional.  My reply included a point I've never heard anybody else make, but needs to be understood:  of course the SS Trust Fund surplus was spent, and should have been spent.  The only question was who decided how it was spent, and so who had to cash in the investments when the Boomer generation retired.

The 1983 SS reforms created the modern Trust Fund.  Mindful of the fact that the massive Baby Boom generation would inevitably retire and tap into the system someday, withholding taxes were raised to create several what is presently a $2.7 trillion reserve, designed to pay out starting about now.  Think of it as a massive 401k plan, where withdrawals from the plan are natural and intended once the contributor reaches retirement age.

Does anybody seriously believe that the excess paid into SS since 1983 should have been locked away in a vault or an underground cave, unused?  Can you imagine just how badly the economy would have performed in the last 30 years if, literally, trillions of dollars had been withdrawn from it (not to mention the multiplier effect of that withdrawal)?

Of course the SS surplus should have been invested back into the economy.  The only two questions were, first, who was to act the fiduciary of those funds?  Anybody think, in retrospect, Wall Street would have been a good choice?  Passing that little issue,  how to spend it could have been decided by private enterprises, public enterprises (i.e., government), or both.  The surplus could have been invested for either private or public spending, or both. Even if it were private entities investing the excess SS funds, and there had been returns of X and Y, the problem of what to do with the returns would still have existed.

What actually happened is that, instead of banks or private enterprises investing the funds, government invested the funds in the general economy, and promised to pay the money back - exactly what would have happened had private firms invested the money.  They would have had to promise to pay the money back.

The second question was, how were the Trust Funds to be invested?  Like a good fiduciary, the US Treasury decided, by law, to invest the SS Trust Fund proceeds in a conservative, safe, highly liquid asset - interest bearing US Treasury bonds themselves.  One certainly hopes (against all odds) that private fiduciaries would have made a not dissimilar choice.

The bottom line is that, at the end of the day, either (e.g.) Goldman Sachs could have promised to cash in those Treasury bonds to pay back the SS Trust Fund when the Boomer generation retired, or the US Treasury could promise to pay back the SS Trust Fund when the Boomer generation retired.  That was the choice. Period.

So now, hopefully, we have established 4 things:

1.  The SS Trust Fund was always going to be invested back into the economy.
2.  The fiduciary of the Trust Fund would almost have to invest most of those funds in US Treasuries and similar vehicles.
3.  The only real question was who was going to be the fiduciary.
4.  When the Boomer generation started to retire, the funds held by the fiduciary in US Treasury bonds and similar conservative investments would have to be cashed in.

That it is the general fund controlled by the US Treasury which has to cash in those bonds vs. a dedicated Goldman Sachs account - or maybe you would prefer a dedicated MF Global account? - is a distinction without a difference.