Yesterday I argued against privatizing Social Security. Today, a few quick thoughts on the other popular solution to the Social Security problem; namely, why not invest some or all of the Social Security Trust Fund in stocks? After all, everyone knows that over the long run, stocks outperform safer bonds — like all my mentors, I’ve been writing that for 25 years.

Wow.

The idea, I assume, is not to have Uncle Sam picking stocks and trying to outsmart other investors. The idea is to have perhaps 40% of these funds invested in a broad, broad index of the market as a whole.

(Interesting statistic Dan Nachbar kindly found for me: the S&P 500 stocks alone account for about two-thirds of the entire valuation of every New York Stock Exchange, NASDAQ and American Stock Exchange issue. So though an even broader sweep would absolutely be appropriate, it wouldn’t be hard to absorb quite a bit of dough in “just” these 500 stocks.)

Sadly, the Trust Fund is not as large as you might imagine. It’s largely a “pay as you go” kind of retirement system, where all our contributions used to go right back out to our grandparents, with nothing put away for our own retirements.

In the past decade or so, however, we’ve begun collecting more than we need to pay out right now, hoping to build a cushion for when the baby boomers are retired, with too few workers to support them all.

That cushion has been growing fatter and fatter (although not so much as to solve the long-term problem), and it’s all invested in U.S. government bonds. After inflation, the Treasury bonds can be expected to earn barely more than 2%, while stocks have historically outstripped inflation by more like 6%. So, the thinking goes, why not juice up the return on this money?

Clearly, the injection of tens of billions of new capital in the market, if it happens, will have effects. One obvious one: raising stock prices (more demand, same supply, equals higher prices). But nearly as obvious: higher borrowing costs to the Treasury.

It’s true, Social Security allows the Treasury to borrow at “bargain” rates. But it’s our Treasury, our debt being financed. Do we accomplish much by raising our return in our right-hand pocket while raising our borrowing costs in our left? And is this really the time to start thinking about pumping even more money into a stock market already flirting with irrational exuberance?

And what happens to the market when the Baby Boomers pass through to the years when the huge buildup in funds needs to be withdrawn? Might this presage many years of a bad market, as any fool can see tens of millions of retirees coming down the pike? Might this lead people to try to cash out as early as possible to avoid the crush?

Talk about leaving an immoral debt to our kids! This one wouldn’t be a literal debt, just the semi-sure knowledge of a massive, long-term stagnant market at best, or a here-comes-the-Boomer-bulge panic and collapse at worst.

Not that this may not happen, 15 or 20 years from now anyway.

(This raises an intriguing prospect. You don’t want to get the government into the business of trying to manage the stock market. Still, the market might be even less prone to unreasoning panic than it is today if people knew that on steep sell-offs, the Trust Fund might take the opportunity to scoop up an extra $50 billion or $100 billion of securities. And it might even help keep the market from reaching dangerous overvaluations if people knew that the Trust Fund would occasionally “take profits” since it has, after all, no capital gains tax to worry about. But one can see all sorts of potential for political abuse and mismanagement.)

(And then there’s the question of why we should even limit this to the U.S. stock market. Overseas markets, in countries growing faster than we are, may do even better than our own. To the extent the Trust Fund could profit by stepping in to soften some other market’s panic — buying when prices have plunged — it could be a potent force in global economic foreign policy at the same time as it aided the world economy and piled up more loot for retirees. So perhaps a small portion of the investable funds should have the flexibility to go abroad, odd as that may sound at first.)

Bottom line: If Social Security funds are shifted from bonds to stocks, who will buy the Treasuries we no longer do? How high will interest rates have to climb to attract other purchasers?

I think we should table this discussion until, some years from now, the stock market seems extraordinarily depressed. At that point, we might well still decide to scrap the idea — but mere discussion of it could perk up the market, giving Greed a chance, once again, to wrest the reins from Fear. Today, Greed needs no help whatever.

In the meantime, what is the solution? It is this: Trim the CPI in line with more realistic statistics; index the retirement age to increases in life expectancy; reduce benefits for those who don’t need them; and remind everyone that for a really comfortable retirement, they need to fully fund those 401(k)s, IRAs, SEPs and Keoghs.

 

 

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