The proposal sounds better than doing nothing (Democrats) or creating private accounts invested in risky stock market accounts with management fees to Wall Street managers that get charged to each person regardless of profit or loss (Republicans). Investing in mortgages and corporate bonds by the SSA is not free of risk but it is a lot lower than individual private account risk and without fees.
It also might stop the government from continuing to take the existing annual social security tax surplus and giving back treasury paper that can only be redeemed if the government borrows a lot more money, probably at higher cost, later. David Bier http://www.msnbc.msn.com/id/7304433/site/newsweek/ A Piggy Bank for Social Security A trust fund invested only in Treasuries is of no real use. Under the Sloan plan, we'd invest the surplus in mortgages and corporate bonds. By Allan Sloan Wall Street Editor Newsweek Updated: 1:53 p.m. ET March 27, 2005 April 4 issue - Yes, it must be spring. Lawns are turning green, baseball season is almost here�and Social Security's trustees have just issued their annual report about the state of the nation's biggest benefits program. Normally, the last of these annual vernal events passes unnoticed by everyone but hard-core numbers junkies. After all, a report consisting largely of statistics isn't exactly a page-turner. This year, though, Social Security's a hot political topic. So lots of folks felt an obligation to react to last week's report, even though its essential message was that nothing much had changed over the past year. The people pushing President Bush's private-account ideas claimed the report showed Social Security is in desperate trouble. Opponents claimed it showed nothing needs to change for decades. Instead of dumping on both sides as I usually do, I'd like to use the report to show how we could easily make Social Security more sound while making federal budget numbers less dishonest. My modest proposal wouldn't solve Social Security's long-term problems�but it's sure better than continuing to have the government spend excess payroll taxes paid by workers, then plead poverty by saying that Social Security has no money to meet future deficits. Here's the deal. Currently, Social Security takes in more than it spends. It sends its surplus cash to the Treasury, getting Treasury securities in return. The Treasury pays interest by giving the fund more securities, rather than paying cash. The fund has few other options: it's allowed to own only securities backed by the full faith and credit of Uncle Sam. I want the fund to stop piling up Treasury securities. Instead, I want the law changed so the fund can buy mortgage-backed securities, high-grade corporate bonds and such. The fund can do this in a variety of low-cost, apolitical ways. In addition, I'd require the government to pay cash interest on the $1.7 trillion of Treasury securities that Social Security now owns. Sure, mortgage securities and corporate bonds are riskier than Treasuries. But such investments would make the trust fund useful when Social Security begins taking in less cash than it spends, projected to begin in a decade or so. Why am I proposing this? The answer lies in Table VI.F8, buried deep in the trustees report. (If you want to follow my math, you need to go online to get the special detailed table at ssa.gov/OACT/TR/TR05/lr6F8-2.html.) Subtract the "Cost" column from the "Income excluding interest" column, and you see that Social Security is projected to start running a cash deficit in 2017. But until 2026, the trust fund would keep on growing even though Social Security's costs would exceed its cash income by hundreds of billions a year. Social Security would look better and better, even though its true state would be worse and worse. Here's where my proposal comes in. As things stand now, Social Security would have to meet these cash deficits by redeeming trust-fund securities with the Treasury. How would the Treasury get the money to pay for them? By borrowing. Thus, no matter how big it might be, a Treasuries-only fund wouldn't make it any easier for the government as a whole to raise cash to pay benefits than if there were no trust fund. A Social Security trust fund invested only in Treasuries looks financially sound, but is of no practical use in covering cash deficits. Under the Sloan plan, Social Security would have $3 trillion of mortgages and corporate bonds in 2017. Cash interest paid by homeowners and corporations would cover the program's cash deficit until about 2026, buying time to fix the system. Or we could use that cushion to help finance a transition to private accounts, should we decide to go that route. The rest of the government would borrow more from investors than it otherwise would, but Social Security's surpluses would actually be saved. Treasury interest rates would be somewhat higher than otherwise; mortgage and corporate rates, somewhat lower. What's more, federal budget numbers would be more honest. Even though Social Security is supposedly "off-budget," people talk about last year's $407 billion deficit. Had Social Security been run my way, the trust fund would have gotten $151 billion of useful assets, and the deficit would have been a much scarier $558 billion. As a percentage of the national economy, that would approach the worst Reagan deficits, which seems to be the level at which Washington might be prepared to take the deficit seriously. In today's world, my proposal doesn't have a prayer. The Bushies want to disparage the trust fund while using Social Security's surpluses to offset revenue losses from tax cuts; Democrats cling to the myth of the trust fund's protecting future benefits. But who knows? Maybe someday we'll do the right thing by Social Security and by the taxpayers. As even Red Sox fans learned last year, sometimes spring dreams can come true. Sloan is NEWSWEEK's Wall Street editor. His e-mail is [EMAIL PROTECTED] URL: http://www.msnbc.msn.com/id/7304433/site/newsweek/ ------------------------ Yahoo! Groups Sponsor --------------------~--> DonorsChoose. 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