The Center for Retirement Research (CRR) recently published results of a study aimed at finding whether the Social Security Trust Fund would be more solvent if it were to buy some stocks. Their results show a 97% likelihood of “yes,” but I take issue with the possibility that it could even be done.
Where do I begin? How about this – What Social Security Trust Fund? Trust Funds are supposed to have money in them! We all know that Social Security is a pay-as-you-go system, whereby no actual money is paid to or from a Trust Fund. Rather, cash flow comes from deposits made the same month by working Americans, and is supplemented by “bond redemptions” from Congress.
Social Security is experiencing massive numbers of retirements within the large boomer population. Lawmakers have proposed raising taxes on high earners, cutting benefits, or some combination of the two. CRR suggests participation in the equity markets, which is not a new idea, but one that has never received Congressional support.
I agree completely that Congress must do something. Since 2010, the Social Security System has been paying out more than it takes in. This will continue for many years, until the level of benefits paid out will have to be cut by 25% - 30% for all recipients, current and future.
Adding stocks would increase risk—both financial and political—to the program, but other countries do hold equities as well as bonds in their retirement programs. Canada is a prime example. They have a huge Trust Fund with a large equity allocation. Why is their system different than ours? Simple -- because their government didn’t spend their Trust Fund, as ours did.
How did our government spend the Trust Fund? They issued their own bonds. To issue these bonds, the government only had to create imaginary currency, while spending the contributions of currently-working Social Security participants. For years, they put pieces of paper (IOUs) into a file cabinet in West Virginia at the “Robert Byrd-Something” building. This is the so-called Social Security Trust Fund.
What happens if the Trust Fund tries to buy equities? When equities are purchased in the stock market, all stock sellers demand and receive money. Cash would have to be provided by current workers or through FED/Treasury shenanigans. But the money can’t come from current workers, because that money is busy paying current retirees. Not only are contributions paid out monthly, but now there are added monthly withdrawals from the “Trust Fund” file cabinet.
So, what options remain? New money. But it can’t be in the form of paper IOUs; it must be cash money in order to pay the stock sellers. Therefore, there is no way for the Trust Fund to purchase equities, except to raise Social Security taxes. That is a political non-starter.
Illustrating the problem in Congress may best be done by example. Several years ago, then-House Speaker Nancy Pelosi claimed in her address to a college graduating class that “Social Security was solvent for 40 more years.” Her audience would be turning 62 when her prediction of insolvency would come true. Adding 40 to the age of college students is rudimentary. The problem is deeper than that.
Bottom line – Congress has been spending the Trust Fund since 1969. Don’t expect changes any time soon.
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