Here’s an Idea: How About a Real Social Security Trust Fund?

No, not the one we have now — which is neither a “trust” nor a “fund.” My idea is an actual trust, with an actual fund.

Here is the way the current “trust fund” works, based on the official explanation on the Social Security website: all money is “invested” on a daily basis in “special issues” of the U.S. Treasury, which are not marketable securities like other Treasury securities but supposedly provide “the same flexibility as holding cash” since they can be redeemed at any time — assuming the Treasury can later borrow enough money to pay them, since the government immediately spends the money and no longer has it when the time for repayment comes.

When your taxes are paid into the “trust fund,” the cash actually (in the words of the website) “goes into the general fund of the Treasury and is indistinguishable from other cash in the general fund.” Translation: there is no Social Security “fund,” much less one held in “trust” by trustees complying with normal fiduciary standards in protecting your retirement assets. The federal government gives the money to itself, spends it, and promises it will pay it back later.

You might think a shorter way to describe the Social Security “trust fund” would be as a mere accounting device, a paper account simply holding IOUs. The government apparently gets a lot of questions about this, because it shows up on the Social Security Administration’s FAQ page:

Q. Why do some people describe the “special issue” securities held by the trust funds as worthless IOUs?  What is SSA’s reaction to this criticism?

A. Far from being “worthless IOUs,” the investments held by the trust funds are backed by the full faith and credit of the U. S. Government. The government has always repaid Social Security, with interest. The special-issue securities are, therefore, just as safe as U.S. Savings Bonds or other financial instruments of the Federal government.

This answer reminds me of the one a friend of mine gave that got him off jury duty. One of the defense lawyers questioning him as a prospective juror said: “This is a lawsuit against my client, which is a large insurance company — do you think you would be unduly prejudiced against such a defendant?” My friend thought for a moment and answered: “Unduly prejudiced — no, I don’t think so.” He was dismissed.

When the Social Security trust fund gives its money to the government, which spends it and provides simply a promise to repay, does the trust fund only get “completely worthless IOUs” to hold? No, not completely.

But they are IOUs just the same, just like any other IOU of the federal government (except that, unlike public debt, they cannot be sold on the open market by the “trustees”). When there is a problem — say a debt ceiling that can’t be exceeded, or a downgrading of government debt that makes it hard for the government to borrow much more (including amounts necessary to pay the “special issues”), or a limit is reached to the taxes the government can impose on the people to fund prior obligations — Social Security recipients suddenly find out that their “trust fund” is at risk, and that they are running risks no different than your average Chinese creditor.

It turns out neither Grandma nor the Chinese has a trust fund. Grandma has only a website that tells her: “I took your money and spent it, but don’t worry — I replaced it with an IOU and I will hold my IOU for you in trust. Don’t let anyone tell you it’s worthless — I’ll borrow some money from some other people later on to repay it. And I can keep doing this indefinitely.”

The federal government is fortunate it is not bound by generally accepted accounting principles (GAAP), or by the Sarbanes-Oxley law, or by the criminal statutes relating to Ponzi schemes. If it were, the Social Security “trustees” would be in jail. One can only imagine the cross-examination of the “Managing Trustee of the Trust Funds” (currently Timothy Geithner) on how he gave the money to the secretary of the Treasury (currently Timothy Geithner) in exchange for Geithner’s promise to repay Geithner, who won’t be around when the repayment comes due.

So here’s my idea: an actual trust, and an actual fund. Instead of the federal government “investing” in the federal government, invest the money in the Social Security fund in the securities of American companies, through publicly-traded mutual funds. It would be a balanced approach (which should be sufficient to get President Obama’s backing for this idea): an equal mixture of stock and debt in publicly-traded companies on the New York Stock Exchange.

There are many advantages to this idea, beyond the obvious one that it would put actual assets into the fund that the government could not get its hands on: First, it would mean that the federal government, instead of investing in itself or simply spending the money, would be investing in America.

Second, the federal government would be putting more money into the country’s capital markets, instead of borrowing from them in ever-increasing amounts.

Third, the federal government might become a little more sympathetic to the need for tax relief for American companies, currently paying one of the highest corporate tax rates in the world, and for relief from burdensome regulations, and the continually increasing costs of simply hiring employees. If the government invested in funds holding the stock and debt of those companies, it might be more concerned about the need for those companies to prosper and grow, even if it took a lower tax rate, less federal mandates, and a few corporate jets to make it happen.

Fourth, the history of investment returns indicates that anyone investing long-term in a balanced mixture of stock and debt of American companies has generated significantly greater returns than simply investing in the debt of the federal government. The Social Security trust fund would have more money to provide for the retirement of Americans — which was the original purpose of the fund before it became a cash cow for other goals.

In 2004, President Bush proposed that younger people have the right to invest a portion of their Social Security taxes in a private investment account for their retirement. Both Democrats and Republicans in Congress rejected that idea. They thought it wouldn’t be prudent to let people control their own accounts. They feared it would take away from other things they wanted to do with the money until “the out years.” They liked the “trust fund” the way it was, especially its reassuring name, although some proposed it be renamed a “lockbox” to provide further assurance.

My idea is to let the taxes remain with the government, but require them to be placed in investments that will be better for everyone, and keep the fund honest in the process. Think of it as an actual fund, held in actual trust, for the benefit of the beneficiaries, rather than the government.