Thursday, March 17, 2005

Social Security Question

Here's an open question to anybody out there that might have thoughts on it. When it comes to Social Security, why isn't the possibility of reinvestment at large in higher-yielding interests being discussed?

The issue for most of the Democrats is distributed risk, but that issue is taken care of simply by the system's collective nature. If you have investments where you get a higher average yield with a higher risk, but that risk is dissipated among a hundred million people, you're still not operating a system with any individual risk.

The issue (they claim) for a lot of the Republicans is the low rate of return on the Social Security taxes. But this kind of idea could boost the rate of return, since the payroll taxes would be invested in higher-yielding portfolios.

Now the way I see it, this kind of system would have more advantages than just distributing the risk and raising the rate of return. It would also help with the solvency debate in two key ways. First, the Trust Fund would be allowed to grow faster. If coupled with a raise of the payroll tax cap, this idea could potentially move the 2018 date (the date that we need to start dipping into the Trust Fund) back by more than the 6 or 7 years of just the cap raise alone*.

Second, if the Trust Fund stoppped investing in Treasury Bills and instead invested in assets that were easier to liquidate, like stock and bond portfolios, the argument that the Trust Fund is simply full of IOUs would lose all of its clout. The federal government would have to tighten its pursestrings in the short term if it were no longer able to pilfer the Social Security surplus, but by the time 2018 (or whatever it may change to) came, we wouldn't be in the same spot of having to raise taxes, borrow, or cut spending in order to pay off the T-bills that the Trust Fund currently possesses.

As I think about it, one possible detriment to this plan is that when the Trust Fund started being drawn upon, perhaps it, being so massive, could cause some kind of fluctuation, some kind of destabilization in the market. But maybe not. I don't really know enough about it.

So anyway, I welcome any comments on this, even if they're just to tell me I'm crazy and I don't know what I'm talking about**.


*Note: By moving the 2018 date back 6 or 7 years, the 2042/2052 date doesn't just get moved back 6 or 7 years; it's significantly more than that, since those 6 or 7 years are ones in which the Trust Fund is growing, and therefore will have considerably more assets to pay out when it needs to start paying out. Therefore, moving 2018 back to 2024 or 2025 actually moves 2042/2052 out past 2079.

**Please don't leave comments of this type.