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Wednesday, August 23, 2006

Locking Up the Social Security Trust Fund

The Washington Times says the public favors Social Security reform to lock up the trust fund by an overwhelming margin:

Social Security reform, by Gary J. Andres, Commentary, Washington Times: Social Security reform ... crashed last year on the rocks of hyper-partisanship... [S]everal important lessons emerged from an otherwise dark cloud of defeat. Doing "something" on the Social Security issue before Congress adjourns could build congressional credibility in this important area of reform...

In the latest American Survey (800 registered voters, conducted July 28-Aug. 3), we revisited the concept of walling off Social Security surplus funds into a "lock box." More than eight of 10 voters say they support a proposal such as this to protect "surplus" Social Security funds. More striking, however, is how these numbers do not vary across, age, party or gender lines. For example, even 84 percent of self-identified Democrats support the lock-box approach compared to 86 percent of the Republicans and 88 percent of the independents. Among younger voters (under age 35), 86 percent support the lock-box idea, as do 87 percent of those over age 65. Given these results, Republican lawmakers would be in a strong position to reach out to Democrats to join them in fashioning bipartisan lock-box legislation. ... In the meantime, some type of congressionally initiated, interim measure that addresses voter concerns about government spending and the looming Social Security crisis may represent an adroit political and substantive move. Even if such an initiative succumbs to a Democratic filibuster, scheduling a vote on such a measure will demonstrate which lawmakers want to protect Social Security for the future and provide shelter from the possible political storm created by congressional inaction in the face of a looming fiscal solvency gale.

Forget Republicans reaching out to Democrats, I think there's an opportunity for Democrats here to get in front of this issue. People do not like that their Social Security contributions are used to fund the rest of government and, as the poll indicates, people largely favor some way of "locking up" the surplus so that politicians cannot use the surplus to offset government spending.

I have made my feelings on privatization very clear, I don't think it's a good idea because it needlessly shifts risks to the individual. But that doesn't mean I favor investing the Social Security trust fund solely in government bonds as is done now. Why not invest the surplus collectively in private financial sector assets so that the individual risk is pooled? This would yield a higher average return, lock up the trust fund, yet shield individuals from risk.

There's no reason why the government can't invest in the stock and other financial market collectively on behalf of the public. There are objections, but that doesn't mean it can't be done. Greenspan objected as follows:

I believe, as I have noted in the past, that the federal government should eschew private asset accumulation because it would be exceptionally difficult to insulate the government's investment decisions from political pressures. Thus, over time, having the federal government hold significant amounts of private assets would risk sub-optimal performance by our capital markets, diminished economic efficiency, and lower overall standards of living than would be achieved otherwise.

His objection is that the government would not be able to resist political pressure on the types of investments, and this would lead to suboptimal investment performance. But it's not clear to me that dumping the entire surplus into government bonds is the correct allocation from an efficiency standpoint. Thus, even though the government may not be perfect, it could still be an improvement in the allocation of the funds to financial markets to have the government moving trust fund assets from government bonds into private sector assets where they can fund private rather than public investment. And there are ways to design the process to minimize the potential for political interference in the types of investments that are undertaken so as to minimize Greenspan's concern. In addition, there is the benefit of higher average returns.

I think the Democrats would be well-served to get out in front of this issue and propose that the trust fund be locked up by investing the surplus in private sector assets, and oppose privatization as needlessly shifting risk to individuals. While I'm hesitant to open the door at all in this political environment because it could lead to 'compromises' I would oppose, this is a way for Democrats to be proactive on a problem the public is clearly concerned about. This will help fend off the obstructionist charges that are sure to come, yet not compromise on core principles.

Am I nuts to propose this?

Answer from comments: Yes...

Let me follow up based on the comments. In the end, it's the government's commitment to honor the trust fund obligations that matters. Suppose the government used the trust fund to buy a private sector asset, say it's a highly profitable factory for a concrete example, and it will be sold later when Social Security obligations require it. Is the trust fund locked up? When the government sells the factory at some point in the future, it can use the money for Social Security, or for other things such as reducing the deficit, the rules can be changed later so it's the government's ability to keep its promises that matters. I think the proposal above helps with commitment - pass a law now that says that the private sector assets in the trust fund can only be used for Social Security upon redemption so that any changes later would need to be explicit and subject to public scrutiny.

    Posted by on Wednesday, August 23, 2006 at 12:30 PM in Economics, Politics, Social Security | Permalink  TrackBack (0)  Comments (27)

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