Categories

Pragmatic Capitalism

Capital for Living a More Practical Life

Should the Social Security Trust Fund Be Allowed to Invest in Stocks?

« Back to Previous Page
0

This is a followup on the WSJ two author op-ed piece https://www.wsj.com/articles/should-the-social-security-trust-fund-be-allowed-to-invest-in-stocks-1491790740

A related and important point came up in a radio interview with an MIT economist about robots who argued that it would be helpful if more workers held capital.

Pikety has argued that the share of income going to capital has increased while the share going to labor has stagnated. Increasing automation is certainly a contributing factor to the increased share going to capital.

Ultimately all retirement income is paid out of current production. If the ratio of SS wage income to capital income was static then there is no advantage to putting part of the SS into stocks. Yes, I understand the SS Trust fund is a fiction. But if the share of income going to wages decreases over time then Social Security is at a disadvantage since in some sense retired workers benefits are based on the wage/capital ratio when they were working.

In a perfect world the Government would invest in real long term capital with the SS Trust fund roughly as private sector savings allocated to the Stock Market works over the long run. Given that this is very unlikely in the current climate, is allocating a portion of the SS tax revenue to a true SS Trust fund invested in the market a worthwhile idea?

Marked as spam
Posted by John Daschbach
Posted on 04/20/2017 5:40 PM
154 views
Private answer

Wouldn’t that be communism? Our government investing in private companies is a no-no of the first order! Maybe if the Trust fund was put back in trust, along with Medicare, and the liability removed from the so-called National Debt, then this would be at least feasible. It used to be that way:

“Creation of the Social Security Trust Fund. The amendments established a trust fund for any surplus funds. The managing trustee of this fund is the Secretary of the Treasury. The money could be invested in both non-marketable and marketable securities.” Wikipedia

“The government adopted a unified budget in the Johnson administration in 1968. This change resulted in a single measure of the fiscal status of the government, based on the sum of all government activity. The surplus in Social Security trust funds offsets the total debt, making it appear much smaller than it otherwise would. This allowed Congress to increase spending without having to risk the political consequences of raising taxes.” Wikipedia

“The trust funds run surpluses in that the amount paid in by current workers is more than the amount paid out to current beneficiaries. These surpluses are given to the U.S. Treasury (and thus become part of the general federal budget) in exchange for special U.S. government securities, which are deposited into the trust funds. If the trust funds begin running deficits, meaning more in benefits are paid out than contributions paid in, the Social Security Administration is empowered to redeem the securities and use those funds to cover the deficit.” Wikipedia

Marked as spam
Posted by Dennis
Answered on 04/20/2017 8:16 PM
    Private answer

    Dennis I think you need to try and understand basic accounting. There has been no meaningful change that you seem to think exists. Unless you allow the government to buy private sector marketable securities with the SS Trust fund then it has to buy Government debt securities (since the government does not issue any equity securities). It is, and has always been, a fiction sold to people who don’t understand accounting.

    There is no trust fund. All government obligations have to be accounted for in the present using some discount model. Money has zero value, it’s just a unit of account. Most people don’t seem to understand this.

    Marked as spam
    Posted by John Daschbach
    Answered on 04/20/2017 8:26 PM
      Private answer

      Sorry John, I’m just thinking about this. The history of social security, the original set up in the 1930s that continued through the 1940s and 1950s, created a real honest to goodness “Trust fund”. That was the changed in 1968 and now we have what we have. I think it was a huge mistake. Were it actually a “Trust fund” it could collect the payroll tax then save and invest however it wanted, like a typical pension fund, so that it could have easily been more than solvent today. But that is gone now. That was my point. Congress confiscated that trust fund’s moolah and now by law the surplus receipts can only be used to “invest” in US government debt, special bonds that can not be sold.

      BTW I understand a lot about basic accounting and also since I’m pretty old with an OK memory, backed up by the data on the internet I get it. So going back to your posted question, I pretty sure SS can not invest in private equity because they have no money, Uncle Sam has it.

      The Office of Management and Budget has described the distinction as follows:
      These [Trust Fund] balances are available to finance future benefit payments and other Trust Fund expenditures – but only in a bookkeeping sense…. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large Trust Fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits. (from FY 2000 Budget, Analytical Perspectives, p. 337)

      The week after his State of the Union speech, G.W. Bush downplayed the importance of the Trust Fund:
      Some in our country think that Social Security is a trust fund – in other words, there’s a pile of money being accumulated. That’s just simply not true. The money – payroll taxes going into the Social Security are spent. They’re spent on benefits and they’re spent on government programs. There is no trust.[23]
      These comments were criticized as “lay[ing] the groundwork for defaulting on almost two trillion dollars’ worth of US Treasury bonds”.[24]

      Marked as spam
      Posted by Dennis
      Answered on 04/20/2017 10:23 PM
        Private answer

        So what is wrong with this data? The employees are paying for most everything, that what.

        Attachments:
          Marked as spam
          Posted by Dennis
          Answered on 04/20/2017 11:43 PM
            Private answer
            Marked as spam
            Posted by Dennis
            Answered on 04/20/2017 11:46 PM
              Private answer

              Learn basic accounting if you don’t have the math skill to learn basic macroeconomics. All retirement is paid for by currently producing workers. You can take a share of their capital, or you can take a share of their wages, but it’s the same macro economically.

              Marked as spam
              Posted by John Daschbach
              Answered on 04/21/2017 1:16 AM
                Private answer

                John, I don’t get your response at all. Your question “Given that this is very unlikely in the current climate, is allocating a portion of the SS tax revenue to a true SS Trust fund invested in the market a worthwhile idea?” I think that is a very good idea and was a fact for the first 3 decades of SS. No math just history. ….. sorrrrrry

                Marked as spam
                Posted by Dennis
                Answered on 04/21/2017 8:06 PM
                  Private answer

                  Ught. There IS a trust fund. Whatever is leftover after paying out current SS benefits is invested into non-marketable Treasury securities in the trust fund and held in West Virginia. The problem with doing this is that SS is giving the surplus to another government entity that also relies upon tax revenues. So there is systemic risk if the government’s taxation powers were to be collectively impaired. The payroll tax and the income tax are for distinct purposes. The Fed was forced to do the same thing which was over 75 years ago and we’re still alive and kicking.

                  If all taxes go to into the Treasury’s General Revenue pool at the Fed, does it really matter? No. It’s just all accounting fiction, just as your earnings record is at the SSA (it’s not like your employer is sending any money to the SSA). What counts is that the records be accurate and accountable.

                  Anyway, I don’t support SS investing into the private sector as that has too many unintended consequences. No, SS should be privatized or at least allow the option for the beneficiary to invest a portion as he sees fit, not a top-down Politburo. SS acts as a fantastic low-cost annuity with low volatility that cannot possibly be replicated in the private marketplace, so replacing it wholesale would actually increase systemic risk.

                  Marked as spam
                  Posted by MachineGhost
                  Answered on 04/25/2017 5:33 PM
                    Private answer

                    @Denis: SS has never invested in the private sector. Conservatives were against it due to the socialist implications — same as I’m against that now (the last thing we need is even more government involvement in the overburdened private sector and certainly don’t need even more crony capitalist monopolies). SS was also supposed to be privatized as per FDR’s intent, but that too got reneged upon.

                    Marked as spam
                    Posted by MachineGhost
                    Answered on 04/25/2017 5:37 PM
                      Private answer

                      Machine, I guess the operative word was “could”. ““Creation of the Social Security Trust Fund. The amendments established a trust fund for any surplus funds. The managing trustee of this fund is the Secretary of the Treasury. The money could be invested in both non-marketable and marketable securities.” Wikipedia
                      https://www.ssa.gov/history/InternetMyths2.html

                      Marked as spam
                      Posted by Dennis
                      Answered on 04/26/2017 4:43 AM
                        Private answer

                        The law allegedly says “non-marketable and marketable securities issued and guaranteed by the ‘full faith and credit’ of the federal government.”

                        Interestingly, Britain provides a low minimum benefit through its traditional pay-as-you-go social security system, but has also allowed people to opt out of its benefits above this minimum through contributions to an expanded IRA. Nearly 70 percent of Britons have done so. These expanded IRA’s definitely have a lot more investment choices than we’re allowed in IRA’s (at least without a lot of expense and hassle via self-directed trustees.)

                        Marked as spam
                        Posted by MachineGhost
                        Answered on 04/26/2017 12:58 PM
                          Private answer

                          At the least, I think we should allow 50% to be privately invested or adopt the British model if we’re not gonna pribatize and go the way of Chile, Argentina (eek!), Peru, Columbia, Uruguay and Mexico. We all know Chile is a resounding success, but I wonder about the others.

                          Marked as spam
                          Posted by MachineGhost
                          Answered on 04/26/2017 1:00 PM
                            Private answer

                            OTOH, I think the Australian model is the best. It relies on patriarchy to fund but is completely privatized. They have no worries at all. Fully funded as far as the eye can see.

                            Marked as spam
                            Posted by MachineGhost
                            Answered on 04/26/2017 1:02 PM
                              Private answer

                              I’m a big fan of the govt investing in these things. In fact, I wish we had a specific department of our govt doing private equity funding. It could be a private/public partnership of some sort. We kinda do that with the way we subsidize certain things, but that tends to be thrown more towards older developed businesses as opposed to spurring innovation (with the exception of the wonderful medical research the US govt finances). I’d love to see the US govt finance more private innovation.

                              Should the US govt invest in the stock market? I don’t see why a small allocation is inappropriate. But why invest in the secondary market when the US govt could position itself to get to the primary markets? Or why not do both?

                              Marked as spam
                              Cullen Roche Posted by Cullen Roche
                              Answered on 04/26/2017 1:05 PM
                                Private answer

                                Roche, I’m afraid you have an a bit of an over-romanticized view of politics and government. 🙂

                                Look up all the cockamamie social investment schemes that were proposed by Bush Sr. to the Clintons to Bush Jr. to Obama and so on that were thankfully never implemented. It would have resulted in another long line of government boondoggles just like Solyndra was. Try and imagine the sheer amount of taxpayer funds that would be currently wasted on “dealing” every which way with the current global warming doom-porn cult religion despite the contrary evidence that the artificial models have been drastically overstating warming — if any warming at all — because of biased bad data and flawed assumptions (of course it was all intentional — careers depend on kowtowing to the government grant gravy train to get funded — which is a warning in and of itself right there). Inconvenient truths such as anti-dogmatic facts would not matter in such a politicalized public-private partnership atmosphere. Facts certainly hasn’t stopped Gore… he still needs to make big bank on his huge carbon credit sunk costs, so he’s released another fear-mongering video to rewrite history about being flat out wrong in his first one. Capitalism should not need to be worrying about puerile identity/group politics that emos believe instead of the profit motive.

                                Marked as spam
                                Posted by MachineGhost
                                Answered on 04/26/2017 1:44 PM
                                  Private answer

                                  Do I have an over-romanticized view or do you have an excessively pessimistic view? The govt wouldn’t run the program. You’d literally partner with private VC firms and force them to have skin in the game. They wouldn’t invest in global warming BS because they don’t do that. My proposal would leverage the financing ability of the US govt and partner it with the best professional investing minds in the VC world. Cap the fees at 1% per year. It’s a no-brainer. But it will never happen because there are too many anti-govt people out there who believe the USA is running out of money and crap like that.

                                  Marked as spam
                                  Cullen Roche Posted by Cullen Roche
                                  Answered on 04/26/2017 1:50 PM
                                    Private answer

                                    I’m unclear on how this would work. For the government to be involved in anything, they would certainly have to use force… to force people to do things that would not otherwise agree to do. Don’t VC’s have skin in the game already? So what would the government bring to the table? How is your proposal different from Homeland Security solicitating private sector bids from companies to build the wall?

                                    You know, what don’t you just write up a paper about this and put it on SSRN. If its a good idea and you address the catch-22’s involved, it should have it out there in the marketplace of ideas. I may be over-pessimistic about the nature of “island time” vs the profit motive, but I’m open minded. Obviously, your idea (or ideal) does work for other countries.

                                    Marked as spam
                                    Posted by MachineGhost
                                    Answered on 04/26/2017 4:21 PM
                                      Private answer

                                      There is no way providing primary funding through VC vehicles will ever be politically possible. There will always be VC failures and these are political landmines even if the aggregate return over all VC investments is positive.

                                      However, I think a politically palatable path would be to fund more scientific research, especially medical research, accompanied with a change in the intellectual property returns from patents on this research. Outside of medical research, look at one simple example: TCP/IP

                                      TCP/IP is the core foundation of the Internet. It was developed using DARPA funding and used on the original “internet” ARPANet. We had ARPANet in grad school in our group because we had funding from the Office of Naval Research. You could only be on the original “internet” if you had DoD funding. What if the US Government held the patent on TCP/IP and collected royalties?

                                      Add in some other important US Government developed technologies like GPS. And then add in drugs. The Harvard School of Public health has estimated that ca. 60% of all new drug classes originate from NIH funded research. The government provides most of the “VC” money and gets nothing in return.

                                      So I think there are politically possible routes to putting some SS revenue into real investments.

                                      Marked as spam
                                      Posted by John Daschbach
                                      Answered on 04/27/2017 3:26 PM
                                        Private answer

                                        When we think about public policy, we have to consider what will be in the best interest of the entire public. The policy that I might personally like in not the main consideration. Every study on the subject shows that no matter what the historical annualized market returns, individual investor returns are only a small fraction of that, especially after fees. Privatizing any part of Social Security is likely to mean that the government (ie taxpayers) will have to make up the difference in performance. It will likely cost a lot more than the current program. We also keep forgetting that nobody actually has a Social Security account. Our annual Social Security statement uses dollars as a scorekeeping method, not a statement of actual current balance. Maybe the people who participate in this forum would be fine managing some of the money they currently contribute to Social Security, but that cannot be a consideration for public policy. A lot of people are plagued by an overconfidence bias, and would probably arrive at retirement age with a whole lot less than if they just left the money in Social Security. In fact, there is nothing stopping people from setting up a self-managed IRA with real money. There is really no need to privatize any part of Social Security

                                        Marked as spam
                                        Posted by Lucas
                                        Answered on 04/27/2017 9:24 PM
                                          Private answer

                                          The point of the question was exactly what is the best public policy. But you go into a tangential and meaningless discussion in this regard when you digress into market returns vs. individual investor returns. It’s pretty simple to make near market returns by investing in large baskets of market stocks. Yes, a S&P500 ETF will be a bit different from a Russell 2000 ETF, and certainly different from an Energy or Tech or Financial or Retail,… ETF. But in the end, now more so than 50 years ago, the benefits of real production flow more to holders of financial equity capital.

                                          I’ve benefitted from this trend because I’ve always saved a great deal and largely saved in stocks. The point is that the shift from labor renumeration to financial capital renumeration has shifted dramatically over my lifetime (ca. 60 years). Those of us who were able to ride the FC wave have done ok or better even if we have never made high incomes.

                                          The question was really a macro economic question. If the share of income going to capital vs. wage increases SS is unstable unless SS captures a proportional share of capital income.

                                          Marked as spam
                                          Posted by John Daschbach
                                          Answered on 04/27/2017 9:57 PM
                                            Private answer

                                            @Lucas: I tend to agree with you, but the sad fact is that we have a lot of impoverished retirees that would not have been if SS was not restricted to investing only in Treasury securities. The difference in outperformance between the wee bit SS gives you and market performance would literally be life-changing. So rather than forcing privatization on everyone, we should just give everyone the option to do so. That way lack of resources won’t stop someone who is poor but intelligent from not getting a better outcome. And there are ways to use innovative insurance to make sure that the downside from an equity high water mark is not too deep so that taxpayers will not be on the hook. But Australia and Britain pretty much guarantee a basic SS if you royally screw up your investing, so that also seems to work. Also, the fiduciary rule would be mandatory before we can allow anyone to invest their SS kitty…. we don’t need the six figure earning fuckheads on Wall Street stealing Gma’s retirement.

                                            Marked as spam
                                            Posted by MachineGhost
                                            Answered on 04/27/2017 9:58 PM
                                              Private answer

                                              P.S. Here is a calculator to show you what you would get with 100% privatization: https://www.crystalbull.com/Social-Security-Privatization-Calculator/

                                              Marked as spam
                                              Posted by MachineGhost
                                              Answered on 04/27/2017 10:01 PM
                                                Private answer

                                                P.P.S. And in reality, it’s highly likely that the way a privatization option would be done in SS is to allow you to invest from a list of pre-approved, low-cost funds. That’s how it is currently done with other government investment programs. So it’s not exactly unbridled caveat emptor in a way that leaves the less informed hanging in the wind.

                                                Marked as spam
                                                Posted by MachineGhost
                                                Answered on 04/27/2017 10:21 PM
                                                  « Back to Previous Page