Wednesday, January 12, 2005
Your Uncle and Your Retirement Funds
Imagine for a moment you were promised a retirement package by your uncle. You gave your uncle a portion of your paycheck every two weeks and you entrusted your uncle to hold onto the money until the day you needed it. When that day came, your uncle gave you the locked box and you opened it only to find pieces of paper on them with the letters 'I O U'.
Angry and confused, you went to your uncle and said, "Okay, give me my money. I'm ready to retire."
His response? "Um, well, I'll be back in a few days. I have to go get it for you." So he goes to your children's house and demands a bigger cut of their paychecks, talks them into taking in less benefits in the future, and also sells them some bonds.
Your uncle comes back to you and gives you your money.
Sound like a scandal? Well, the above situation is a loose analogy to the current status of the Social Security Trust Fund today. The trust fund is full of paper labeled 'I O U'. $1.6 trillion of them to be exact.
Where's the money? Well, it's been spent. According to a Money/CNN article:
However, let's think about this for a minute. Suppose there was no law requiring the transfer of excess funds to the US Treasury. Instead, the funds remained in an account at the US Treasury for the benefit of the Social Security beneficiaries (retirees). That's $1.6 trillion dollars.
That's a lot of money to be sitting idle. Why not invest it? Well, who would own the fund? What would the investment philosophy be? Who would determine the philosophy? Would the investment philosophy be 'socially conscious'? Essentially, do we want the US government involved in the business of investing public monies in the public markets?
I would be leery of such investment clout residing with an agency of the government. CALPERS board members have recently been criticized for becoming aligned with special interests. CALPERS is America's largest pension fund with ~$170 billion dollars held in trust.
While the above scenario is just a mental exercise, it highlights a problem in keeping piles of retirement money in the hands of the government: it can sit idle (not economically efficient), be invested on behalf of the trustees (thus making a government agency an owner of public stocks), or be spent by the politicians yearly (perhaps the least worst option, in the short run).
A key assumption in the above exercise is that the government retains ownership of the retirement monies. What if individual persons were allowed to keep at least a portion of their monies to invest/save for their retirement? Sure, the ponzi scheme would come crashing down faster, but that day is going to come regardless if we attempt a fix now or wait.
Angry and confused, you went to your uncle and said, "Okay, give me my money. I'm ready to retire."
His response? "Um, well, I'll be back in a few days. I have to go get it for you." So he goes to your children's house and demands a bigger cut of their paychecks, talks them into taking in less benefits in the future, and also sells them some bonds.
Your uncle comes back to you and gives you your money.
Sound like a scandal? Well, the above situation is a loose analogy to the current status of the Social Security Trust Fund today. The trust fund is full of paper labeled 'I O U'. $1.6 trillion of them to be exact.
Where's the money? Well, it's been spent. According to a Money/CNN article:
But that surplus isn't a pile of cash waiting to be used. In fact, the money -- $1.5 trillion plus interest to date -- has already been spent.The 'full faith and credit clause' of the US government backs these bonds. Ultimately, when the bill (social security retirement payments) comes due, the money will have to be raised to pay the recipients via debt or increased taxes, lower benefit payments, or a combination of the above.
In accordance with the law, the extra money Social Security takes in is loaned to the U.S. Treasury, in exchange for which it receives special-issue Treasury bonds. The actual cash goes into the government's general revenue pool.
However, let's think about this for a minute. Suppose there was no law requiring the transfer of excess funds to the US Treasury. Instead, the funds remained in an account at the US Treasury for the benefit of the Social Security beneficiaries (retirees). That's $1.6 trillion dollars.
That's a lot of money to be sitting idle. Why not invest it? Well, who would own the fund? What would the investment philosophy be? Who would determine the philosophy? Would the investment philosophy be 'socially conscious'? Essentially, do we want the US government involved in the business of investing public monies in the public markets?
I would be leery of such investment clout residing with an agency of the government. CALPERS board members have recently been criticized for becoming aligned with special interests. CALPERS is America's largest pension fund with ~$170 billion dollars held in trust.
While the above scenario is just a mental exercise, it highlights a problem in keeping piles of retirement money in the hands of the government: it can sit idle (not economically efficient), be invested on behalf of the trustees (thus making a government agency an owner of public stocks), or be spent by the politicians yearly (perhaps the least worst option, in the short run).
A key assumption in the above exercise is that the government retains ownership of the retirement monies. What if individual persons were allowed to keep at least a portion of their monies to invest/save for their retirement? Sure, the ponzi scheme would come crashing down faster, but that day is going to come regardless if we attempt a fix now or wait.
