Oct 15th, 2008 at 2:34 pm
Trust Fund
Brad DeLong suggests that now might be a good time to take the Social Security Trust Fund balance out of treasuries and put it into equity. I agree. In general, this is a policy that’s never gotten the level of consideration that it deserves. And as Brad says, right now is a great buy low, sell high opportunity for the government.
37 Responses to “Trust Fund”
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October 15th, 2008 at 2:40 pm
Well, maybe…
But lots of people seem to think this is a “Bear Rally”. It’s interesting that the huge jump in stock prices a couple of days ago was percentagewise the 5th biggest in history, with the four above it all being from 1931, 1932, and 1933. Those really weren’t the best years to buy stocks.
What happens if the market loses another 50% of its value? Will DeLong make up the difference from his private portfolio?…
October 15th, 2008 at 2:40 pm
Hey all…uh, what does this post mean?
Thanks,
financial n00b
October 15th, 2008 at 2:42 pm
No, it’s not.
The market still has a way to fall . . . we haven’t hit bottom by a long shot, yet.
But maybe you disagree.
This sort of makes my point for me: trying to figure out a good way to invest social security funds into equities is inherently risky. Maybe you are right, and now is the time to buy. Good deal!
On the other hand, maybe I’m right and we’ll see the markets lose another 5 – 10% before starting a slow and steady climb — that’s a lot of ground to make up before we start seeing any sort of return.
Unless and until we figure out some what to actually and accurately predict this sort of stuff, I’d much rather we keep the huge Trust Fund invested in American bonds. (1) We can (sort of) count on those being repaid; I mean, how could we continue to borrow from the rest of the world if we stiffed ourselves?, and (2) since we have to put the Trust Fund somewhere, let’s at least continue to signal that we believe in ourselves.
October 15th, 2008 at 2:42 pm
maybe.
http://culturedecoded.wordpress.com/2008/10/14/the-importance-of-the-final-presidential-debate/
October 15th, 2008 at 2:44 pm
I said this a while ago here: we ought to be pitching the capital-for-equity portion of the bailout to conservatives as a “privatization of Social Security” thing.
October 15th, 2008 at 2:45 pm
I’m not sure about the policy, but I’d just be happy if we’d account for the “trust fund” appropriately and make it clear that the general fund has been borrowing the entire FICA surplus each year without actually mentioning it.
October 15th, 2008 at 2:46 pm
The bailout of financial companies is functionally equivalent to transferring $250 billion of the social security trust fund into preferred stock investments, i.e. almost equity. As for the wisdom of concentrating the full investment in one sector . . .
October 15th, 2008 at 3:01 pm
Neat idea except for the fact that the trust fund does not hold marketable securities. To do what you suggest, the trust fund would have to demand the treasury pay over to it its 2 trillion plus owed right now and then use it to invest in the market. The treasury would have to borrow 2 trillion, effectively converting all the debt to publicly held debt.
October 15th, 2008 at 3:01 pm
This is an AWFUL idea. Clinton’s privatization scheme for social security was not any better idea than Bush’s. What we need to do (once the economy recovers) is start running budget surpluses again so that we save the money necessary to pay the boomers’ social security checks. Gambling it away in the stock market is a good way to leave the elderly with LESS security.
October 15th, 2008 at 3:03 pm
As numerous people have pointed out, Social Security’s fiscal challenges aren’t particularly severe — nothing that a couple of points of GDP’s worth of extra funding won’t cure (and we’re talking forty or fifty years here). If it ain’t broke don’t fix it.
October 15th, 2008 at 3:05 pm
I’m not conversant in this stuff but Doug (#8) seems to have a deal-breaking objection of some importance.
October 15th, 2008 at 3:06 pm
is matt suggesting we make all social security recipients trust fund scumbags?
October 15th, 2008 at 3:14 pm
I’m sure people in Japan thought the same thing after the 89-90 drop, the 90-91 drop, and the 91-92 drop. They’d be barely above water from the 91-92 trough. It’s now 29000 below its peak (38000 in Dec 90, 9000 today)
October 15th, 2008 at 3:25 pm
At an S&P 500 of 900 the P/E on trailing operating earnings is 13.
That is getting down to the edge of a normal valuation range,
but compared to bottoms of 6-8 ar other bad bear markets (1974)
it is still not at bargain levels.
October 15th, 2008 at 3:26 pm
…um what happens in 2038 when we have to start selling the equity Social Security bought in 2008? And in between now and then what happens to the market since Social Security would be sitting on a big chunk of it?
… for that matter what happens to the market when Boomers start cashing out their 401-k/IRA money in 2023… Or the real estate market when they decide to sell the primary residence in the Rustbelt ( or a Sunbelt city ) and retire to the second home they bought in 1995….
October 15th, 2008 at 3:37 pm
It’s a “bold idea,” but even this risk-taking 27-yo investor must admit equities are probably too volatile for Social Security.
I think this leads into more general investing wisdom that is lost during bull markets: If you know you’ll need the money, then you shouldn’t take risks with it.
Bull Markets have this way of convincing everyone indexes automatically ‘go nowhere but up’ (”Dow 36,000″ and all that). It’s not true: The Nikkei is THE example, delivering a whopping -75% loss 1990-present.
My two scenarios: 1. If equities/stocks recover and gain value soon, the Economy is going to be doing well. Tax revenues will be historically high, our government will be flush, and for many SocSec payments will be simply extra income.
2. If equities/stocks sink and never recover, the Economy is not going to be doing well. Tax revenues will be historically low, our government will be short of money, and many people will desperately need their SocSec payments to pay daily expenses in retirement.
Scenario 1 makes SocSec-in-equities look great… But who benefits? Scenario 2 makes SocSec-in-equities look disastrous, and our less fortunate elderly are eating dog-food b/c they aren’t receiving enough payments.
Far as I can tell, the point of “Social Security” is to protect us in our old age esp. under scenario 2, not to mint the government money under scenario 1.
October 15th, 2008 at 3:51 pm
I may be wrong about this but wouldn’t this require action by Congress? It is my understanding that the Social Security Administration is currently required by law to invest its surpluses in treasury instruments.
October 15th, 2008 at 3:53 pm
Ha! You actually believe that money exists anywhere other than on paper! Can I sell you a bridge to nowhere?
That “trust fund” was spent long ago as part of the overall deficit. The money is long gone and the only way to get it back is through taxes or borrowing.
October 15th, 2008 at 4:23 pm
Doug #8 and Alan #18 nail it.
Going forward, we could invest SS surpluses starting with FY09 in equities. I believe the system is projected, under current parameters, to generate surpluses until 2018.
It’s funny that today Paulson and Bush are gung ho for buying the banks, after Greenspan explicitly argued for a tax cut in 2000 by fretting that if we keep running surpluses and eliminate the federal debt, something would need to be done with the extra cash, and government shouldn’t be owning big pieces of companies.
October 15th, 2008 at 4:26 pm
The SS trust fund does not hold ordinary Treasury bonds and notes. It holds special IOU’s which are not tradeable. An act of congress could perhaps make them into run of the mill and thus fungible Treasury securities which could be sold.
If they then dumped the trillion or so of the on the credit market it would likely drive up interest rates and or crowd out other borrowers with the massive new supply. Something which is already happening.
Buying stocks would be fraught with fairness issues and fraud. It would in fact be a direct subsidy of the stock market which is an unbelievably terrible idea. That’s what the tax deferred retirement plans, IRA and 401K’s have been and the results are now a disaster.
The purpose of the stock market is always to favor insiders.
October 15th, 2008 at 4:35 pm
I assume that Alan is joking, as the assumption that the US Treasury will make good on its debts is one of the pillars of modern civilization.
That said, I don’t like the sound of putting social security money into equities at all. Is the idea that this economy is SO bad that the government should do something radical to show it’s support of the market? Can we do that with the defense department’s money, not the SSA’s?
October 15th, 2008 at 5:14 pm
In general, this is a policy that’s never gotten the level of consideration that it deserves.
Fellow commenters, read that sentence again. The post is a joke.
October 15th, 2008 at 5:41 pm
I think (hope) that Brad has his tongue firmly in his cheek
October 15th, 2008 at 5:44 pm
Here is my radical idea. Stop accumulating the surplus and sell off the trust fund and return it all people who have paid in according to how much they have paid in.
First. Stop accumulating the surplus. Lower the FICA withholding rate to where it will be pay as you go as of the year my radical plan is enacted. Say 2009. (SS is still accumulating a surplus this year. Which gives lie to all the panic about it. None the less this silly panic about it will never end till we get rid of this surplus. Keep that rate permanently. Pay out benefits every subsequent year at a rate that matches that years expected withholding s. forever. That means in a half dozen years or so SS benefits will start to drop but they will never disappear.
Make the trust fund Treasury holdings fungible and sell them off over a period of a couple of years. As you know since you probably get a letter from SS every year saying exactly how much you earned every year of your life they know how much you have paid in so they can figure what portion of the surplus is yours.
Send out the money as the newly fungible SS trust funds Treasuries are sold off. Thus a trillion dollar cash stimulus will be going out to every household in America over the 1, 3, or 5 years it takes to liquidate the trust fund. Doing it all at once is counter productive because it will be such a burden on the already stressed credit system.
October 15th, 2008 at 5:55 pm
I’m always amused by the idea that the Federal Government “raids” the SS Trust Fund for extra spending money.
When my FICA contribution is used to buy a Treasury note, it isn’t useful for it to just sit there any more than money I deposit into a bank. When the government spends money, in general (*), it helps grow the economy. Therefore, I’d consider it an investment in a larger and more prosperous future tax base.
If the purchased notes just sat there, there’d be no activity to pay the interest on them, and nearly $2.5 trillion would have been withdrawn from circulation.
The thing that I think people mean to object to is when the government started including FICA intake in the tax/budget charts, so that it didn’t look like we were running (so much of) a deficit.
If Congress continues to consistently grow the Federal deficit over the next 30 years at the rate it has been over the last 8, faster than the growth of the economy, then we’ll have problems when it comes time to start redeeming the Treasury notes. But, that’s not a failing of the SS system.
(* Except when it pisses it away in a war. I realize that the national defense is in general an economic good, but I don’t think we’re currently getting value for our money.)
October 15th, 2008 at 6:16 pm
I totally agree.. let’s buy us a couple of Banks, maybe 4… say 25 billion in each. Preferred shares, of course, no voting… An insurance company or two, maybe one or two mortgage quasi governmental agencies.
October 15th, 2008 at 8:30 pm
Trust Fund? You do realize that the “Trust Fund” is filled with IOUs, right? The surpluses that Social Security has been generating over the last few decades have flowed straight into the general fund and spent.
Which means that any “money” you take out of the “Trust Fund” is just more inflationary pressure being created. I thought DeLong was smarter than that.
October 15th, 2008 at 10:51 pm
Ok, I get it, I just don’t read here enough.
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