Where should Social Security surplus be kept?

[Craig234]

Put aside the issue of the upcoming lack of a surplus. Let's say the period 1940-1980.

The fund is going to have a huge surplus, needed for future payments. Where should that money be kept?

- Store the cash - no appreciation, inflation eating it up
- Store it in US treasuries - safe investment, but provides the government spending money
- More diversified investments - introduces risk and politics as factors, 'distorts markets'

Or some other idea?

This isn't about 'privatization', so don't bring that up in this thread.

 

[xBiffx]

My wallet.

 

[cubby1223]

It doesn't matter. In reality it all gets lumped in with the general funds.

 

[blankslate]

The proverbial "lock box" so that it is only used for paying out Social Security benefits.

Perhaps gold and invested in index funds that follow the market? Index funds seem to be very reliable but I could be wrong.

 

[chucky2]

In a place that allows no Politician, or any group of Politicians, or any other group of people, to blow through that money like a drunk sailor on leave. Wherever that is, I'm probably OK with it (unless that place is setup as some new scam/slush fund...you can never discount the "smarts" of 'super smart political and/or economic guys').

 

[cubby1223]

Case in point, "Store it in US treasuries" is just an accounting gimmick equivalent to "lump it all in with the general funds."

The question of "More diversified investments" makes sense only if the rate of return on investments is higher than the interest paid out on money borrowed to cover the deficits elsewhere. And if the rate of return was higher, then why doesn't the federal government use all available resources to invest? Why settle at just the "social security surplus"?

 

[gevorg]

let people have some control over where the money goes, for example:

the ones near the retiring age might want something like 80% in treasuries and highly rated bonds, 20% in a stock index fund

the ones who are just entering the workforce after college, inverse of above

if someone chooses to ignore it, then go with a very conservative model like 100% cash + savings interest, or just treasuries/bonds

 

[WackyDan]

I have to say Craig... By leaving out privatization your options are pretty slim if any. I think it has a place though. So out of respect to the thread, I'll only leave my point at that.

 

[Fern]

Craig,

I don't know of a better place to put the money than Treas bonds. My only problem with that is the low rate of interest those special SS bonds pay. Because of that low rate, I think the fed govt is keeping it's debt expense low at the expense of the SS fund. I.e., using SS funds to 'back door' fund the general account (Of course, the SS money itself is a front door source of funding, but that's another matter.)

My fear in investing in equities on the stock market is what happens to SS when the stock market tanks, as it does periodically? It's bad enough peoples' IRA's and 401(k)'s tank, but SS too? This is my problem with ideas of privatizing SS.

Then there are many other problems, mostly involving opportunities for mischief. SS is a lot of money, wouldn't choosing a stock (or stocks, of course) to invest in drive it's price up higher? Of course it would. Who chooses the winners and losers?

Would the govt personnel in charge of investment decisions be influenced to choose investments based on political ideology? (Or worse, campaign donors)

Is investing in companies and regulating them at the same time incestuous? I think so. Could it lead to conflicts of interests?

We're now trying to clamp down on a type of insider trading. It's a 'new' kind, where regulatory decisions, or awarding govt contracts etc can influence share price. Throwing SS into this mix leads to all kinds of ethical questions. If a company gets awarded a big govt contract is it because it's the best, or because SS owns a bunch of it's stock? If it dumps a stock is it because the SS trustees know some expensive regulation are coming on the way that will reduce the price of shares?

Would the funds be used to bailout companies or countries without it being called a bailout?

I see too much potential for problems, real or perceived, for it to be advisable to invest in anything other US Treas.

Lastly, as an a finance professional, there is simply nothing safer than US Treas if you want to protect against principal loss. And I believe assuring no loss of principal should be the number 1 priority for a program like SS.

Fern

 

[cubby1223]

Craig,

I don't know of a better place to put the money than Treas bonds. My only problem with that is the low rate of interest those special SS bonds pay. Because of that low rate, I think the fed govt is keeping it's debt expense low at the expense of the SS fund. I.e., using SS funds to 'back door' fund the general account (Of course, the SS money itself is a front door source of funding, but that's another matter.)

It doesn't matter.

The government promised to pay a fixed amount back to retirees, not a variable amount. The social security fund, and the general fund are one and the same.

 

[ElFenix]

i'd have gone with option D, eliminate the surplus and match incoming and outgoing as closely as possible on a quarter to quarter basis.

either that or make it fully funded with a property interest in the account (so congress can't just decide to cut benefits later)


fwiw, the current special treasury is exactly the same as cash.

My fear in investing in equities on the stock market is what happens to SS when the stock market tanks, as it does periodically? It's bad enough peoples' IRA's and 401(k)'s tank, but SS too? This is my problem with ideas of privatizing SS.

i know investing social security in a riskier (but with far more upside) manner is often called privatization, but that's a bit of a misnomer. private means belonging to someone in particular. you could privatize social security but still require everyone to invest in treasuries only.

what i'd like to see is some big math that tracks various scenarios for investing someone's social security in treasuries vs. investing in a stock market index (and other investment vehicles). keep in mind that all the money need not be pulled out of the market the moment someone hits retirement. the dow has doubled since it bottomed out there in 2009, so even if you started needing payments the day it bottomed, you could still have ridden much of the gain.

 

[cubby1223]

When you talk about different options, comparing rates of return on private investments, versus government investments...

Investing in a company, or even placing money in a bank savings account or cd, the amount of interest you receive back is determined on how well the company or the bank generated profits. When you're talking about treasuries, the amount you receive back is basically determined by how much new money the government decides to print. And when you start considering the reality of the government borrowing from itself, and paying itself with money it printed by itself, it just gets very, very stupid (in my opinion). And if the government doesn't print the money to cover the interest, either (A) the interest is covered from other investors injecting new money into the system (a.k.a. a ponzi scheme), or (B) the interest is covered from new taxes.


I guess what I am saying, is, I disagree with the original premise that there ever was a social security surplus.

 

[Fern]

It doesn't matter.

The government promised to pay a fixed amount back to retirees, not a variable amount. The social security fund, and the general fund are one and the same.

I'd say it does.

Had there been a decent amount paid on the SS bonds the SS surplus would be higher.

Actuarially, the SS program would be in much better shape.

Since it's not I say we're going to see political action to shore it up. That will likely be one or more of the following: 1. reduction in benefits, 2. extension of retirement age, or 3. increased taxes.

There's your difference.

Fern

 

[ElFenix]

I'd say it does.

Had there been a decent amount paid on the SS bonds the SS surplus would be higher.

Actuarially, the SS program would be in much better shape.

Since it's not I say we're going to see political action to shore it up. That will likely be one or more of the following: 1. reduction in benefits, 2. extension of retirement age, or 3. increased taxes.

There's your difference.

Fern

if the treasuries paid more we'd have had to increase taxes more in the first place.

 

[werepossum]

I'd say market accounts with a broad base of low overhead index funds. Had that been done, retirees would receive an order of magnitude more money, though granted, that's with hindsight. Had I been setting up the system a few decades after the Great Depression I don't know I could have taken that risk.

 

[Nintendesert]

I think we should buy more GM stock with the surplus.

 

[cubby1223]

I'd say it does.

Had there been a decent amount paid on the SS bonds the SS surplus would be higher.

In my opinion, the only value there is to investing the surplus in treasury bonds is politicians get a talking point that social security is financially stable, even if reality is the government is drowning in uncontrollable debt.

Money is put into a bond. Now the Social Security Administration must turn that bond back into cash to pay out to retirees. Where does the cash come from? If more interest were paid on the SS bonds, where would that extra cash have come from?

 

[Ausm]

1st don't let Politicians touch and invest in Treasury bonds.

 

[Fern]

In my opinion, the only value there is to investing the surplus in treasury bonds is politicians get a talking point that social security is financially stable, even if reality is the government is drowning in uncontrollable debt.

Money is put into a bond. Now the Social Security Administration must turn that bond back into cash to pay out to retirees. Where does the cash come from?

Basically, the Treas can either pay it off from surplus funds in the general account (yeah, right), or the Treas has to refinance the payoff of the SS bond with the issuance of a regular bond.

If more interest were paid on the SS bonds, where would that extra cash have come from?

Out of the general account. So either we would've spent less or borrowed more, or some combination of the two.

Fern

 

[EXman]

Look at Galveston Texas.

http://www.ncpa.org/pub/ba514

Check it out their retirees get 3-4 times more a month than Social security.

I'd rather scratch SS altogether even though I have paid for over 20 years

 

[Nebor]

Look at Galveston Texas.

http://www.ncpa.org/pub/ba514

Check it out their retirees get 3-4 times more a month than Social security.

I'd rather scratch SS altogether even though I have paid for over 20 years

Holy crap. I had no idea that Galveston had that going on. That's pretty amazing. I'm curious to hear counter-arguments.

 

[WHAMPOM]

Put aside the issue of the upcoming lack of a surplus. Let's say the period 1940-1980.

The fund is going to have a huge surplus, needed for future payments. Where should that money be kept?

- Store the cash - no appreciation, inflation eating it up
- Store it in US treasuries - safe investment, but provides the government spending money
- More diversified investments - introduces risk and politics as factors, 'distorts markets'

Or some other idea?

This isn't about 'privatization', so don't bring that up in this thread.

I vote for a "NO Surplus" "PAYGO" system, reduce collections to pre Reagoon era, kill that piggy bank Reagoon used to fund Tax Breaks for the Rich. SS looks like it may end up a little short on payments? Just raise the collection cap to the first $million or $hundred million. Hell, collect on anything above the first half $million of Capital Gains too.

 

[the DRIZZLE]

In the abstract there is nothing particularly wrong with investing it in treasuries. However, in practice it is treated as part of the annual budget so the trust fund is really fictional.

I don't think you can give a comprehensive answer to this question without first defining what the fundamental goals of SS are. Is it a government mandated retirement savings program or is it social insurance? If it's the latter what level of benefits do we as a society want to provide. If it's the former should it be thought of as a defined benefit or defined contribution plan? Once you answer these questions the asset allocation becomes easier.

 

[Bateluer]

Kinda late to hold this discussion, since politicians spent all that money and then some decades ago.

 

[ichy]

I would've put some of the money in foreign bonds. Let the rest of the world help pay for SS. I don't think that putting the money in the stock market would work because throwing that much money into the market would massively distort stock prices.