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Long time single-payer advocate Kay Tillow wrote a piece last weekend taking issue with my willingness to invest a portion of the Social Security trust fund in the stock market. This is a response to the main points.
First, I should clarify what is at issue. I am certainly not supporting in any way changing or reducing the guaranteed benefit from Social Security. I have spent much of the last 20 years fighting the people who want to cut benefits and/or replace Social Security with individual accounts. I am not switching course on my opposition to this.
Second, I did not envision the trust fund investing in individual stocks as Ms. Tillow implied. I assume that any investment would be in the form of a broad index fund like the S&P 500 or the Wilshire 5000. I don’t know of anyone who advocates having the fund invest in individual stocks.
This also addresses the issue of fees charged by Wall Street investment fund managers. The fees for investing a fund of this size in an index fund should be on the order of 1-2 basis points (0.01-0.02 percent). We have a precedent for this; the Thrift Savings Plan for federal employees contracts the management of its fund for a fee in this range. There would be no reason to expect higher fees for the Social Security trust fund.
In terms of the risk of investing in the market, it is hard for me to see any serious risk, precisely because the stock market has plunged from its bubble-inflated levels. I had argued against investing in the stock market in the late 90s, when this idea had become very fashionable in Washington, because the stock market was in a bubble.
Relative to trend earnings, prices are now at less than half of their bubble peaks. Given this plunge in price to earnings ratios, it is very hard to draw a plausible economic scenario in which the return on stocks over the next 10-15 years will not exceed the return on the government bonds that the fund now holds.
It is also important to remember in this context that the trust fund is not like an individual; it will never be forced to sell off its holdings on any given day. If the market is depressed for a prolonged period of time it would be possible to defer sales indefinitely.
There are still issues that should be discussed if the trust fund were to go the route of investing in the stock market. For example, it would be important to have some assurance that ownership of a stake in the market would not be an argument against enforcing the law against big corporations. In other words, we would want to be sure that if Social Security had a 5 percent stake in BP that it would not be used as an argument against holding BP accountable for its spill.
The government already shares risk with private corporations through the corporate income tax, so stock ownership does not create a new situation in this respect. Still it would be desirable to get a commitment from all sides that the trust fund’s indirect ownership of stock should not be a factor in policy decisions.
Finally, it is worth noting this debate is likely moot at this point. In the past, when investing the trust fund was considered, it was in the context of investing a portion of the annual surplus of tax revenues over benefits. At the time, the program was running large surpluses and was projected to continue to run surpluses for two decades.
This is no longer the case. Due to the downturn and the aging of the workforce, the annual surplus of taxes over benefits is now near zero and is only projected to be at all positive for a 6-7 more years into the future. This means that unless the fund uses interest from the bonds it now holds to invest in the market, or sells off some of these bonds, it would have relatively little to invest from this point forward. Since few people, if anyone, has explicitly advocated going this route for investing funds in the stock market, it is unlikely that the idea will advance very far.
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So then, do we pull the money out of the stock market when its in a bubble? Who gets to make that determination? Or do we just let it sit there and have the value destroyed along with the rest of the market, and just hope that I won’t be among the people who needs Social Security around the same time as the market goes tits up?
Furthermore, what’s the point of this exactly? I mean it’s not like the government needs to make investments in capital markets in order to make money. It can just make it. Other than keeping alive the fiction that we’re operating in a pre-1971 monetary system, why even bother with this at all? About the only consideration here seems to be moral hazard, and the fact that everyone pays already takes care of that.
I’m still wary on this idea.
The guy running the Pension Benefit Guarantee Corp’s fund tried to move the fund from bonds to the stock market at what was basically the height of the housing bubble. Given the manner that our stock market has functioned and may continue to function, I don’t think that individual stock picking is required for problems to appear.
What’s worse is that the dismantling of your argument is embedded within it. If this is true, that SS funds need not be concerned by markets in prolonged depression because they can defer sales indefinitely while meeting obligations, then there’s no reason to move the money into markets for allegedly higher yields, because one could simply consider the inversion of total payments to withdrawals based on changing age demographics to be one such prolonged depressed market. We ought to just be able to defer sale (withdrawals) indefinitely until the inversion flips back the other way at some point.
Kill the cap solve the problem.
Plausible economic scenario:
This is not only plausible, it is a virtual certainty unless we get our hunger for petroleum under contro.
This is a supremely dumb idea. First, stocks are still in a bubble. They are vastly overpriced relative to an economy going into the tank. Second, stock markets are consistently rigged by HFTs. How do you think firms like Goldman and others can go a whole quarter with not even one single day of losses? Third, these index funds are really the slowest moving of the slow movers. Investing in them is begging to be ripped off.
I have a number of problems with investing any Social Security Trust Funds in an indexed fund. A big problem with US state pension funds is that they are investing forward while looking in the rear view mirror of recent historical returns. An expanding, consumption economy may not be in the US future. In my opinion the entire US corporate world has followed Enron type accounting in a Darwinian exercise of only the most criminal survive.
One just as well might argue what the average maturity of the Funds Treasury securities should be.
As it is, the Trust Fund average maturity has decreased from 7.9 to 6.9 years in the last 12 months while the Funds withdrawals will extend out over the next 30 years or so.
http://www.ssa.gov/OACT/ProgData/investheld.html
As a long time share holder and someone who invests my private earnings in a variety of places, I respectfully disagree with you and your suggestion.
I vehemently do NOT want any Soc Sec funds invested this way. It’s a mistake.
But thanks for a thoughtful post on the topic. I agree with a prior post, IF there are any issues with the Soc Sec trust fund, then raise or eliminate the cap on the income deduction and the problem is solved. Soc Sec is incredibly regressive. How ’bout some of the obscenely wealthy paying their way for once?
If we want a good return on our SS Trust fund, we should place it as capital for a Mutual Bank, owner by the public, for it to be lent under prudent and public underwriting standards, to our business and citizens for their use as loans.