Why Isn't Social Security's Reserve/Trust Fund In Equities?

[marko]

The "SS will go broke in X years" has been going on for X+Y years. You can find the same headline back as many years as you care to look.

50+ years ago when I first started working, someone told me "by the time you're ready for SS it'll be long, long gone...it's already bankrupt now!!".

That was around 1968 or so....got my first SS check 3 years ago. All's well. It just has to keep paying me for another 20 years and I'll be happy.

 

[donheff]

It seems like asking why doesn't Uncle Sam turn around and invest the money I pay for Treasuries in equities. Government's are not banks. They don't re-lend the revenues from bond issues or invest them in alternative revenue generators. They spend them with the promise to repay them from ongoing revenues (taxes). The problem is when they don't set up the tax side adequate to pay the debts. In the case of SS the payroll tax is about 25-30% under-funded. Not the end of the world and certainly no different in principle from Treasuries -unless we allow the Government to treat it as different and cut SS rather than fix the funding side.

 

[rbmrtn]

It is required by law to invest in US obligations.

Some details here , https://www.ssa.gov/oact/NOTES/note142.html

One item of note they specifically prohibit capital markets so that the fund doesn't disrupt it.

The Council recommends that investment of the trust funds should, as in the past, be restricted to obligations of the United States Government. Departure from this principle would put trust fund operations into direct involvement in the operation of the private economy or the affairs of State and local governments. Investment in private business corporations could have unfortunate consequences for the social security system--both financial and political--and would constitute an unnecessary interference with our free enterprise economy. Similarly, investment in the securities of State and local governments would unnecessarily involve the trust funds in affairs which are entirely apart from the social security system

 

[donheff]

It is required by law to invest in US obligations.

Some details here , https://www.ssa.gov/oact/NOTES/note142.html

One item of note they specifically prohibit capital markets so that the fund doesn't disrupt it.

The Council recommends that investment of the trust funds should, as in the past, be restricted to obligations of the United States Government. Departure from this principle would put trust fund operations into direct involvement in the operation of the private economy or the affairs of State and local governments. Investment in private business corporations could have unfortunate consequences for the social security system--both financial and political--and would constitute an unnecessary interference with our free enterprise economy. Similarly, investment in the securities of State and local governments would unnecessarily involve the trust funds in affairs which are entirely apart from the social security system

Even that "investment" is a paper fund and a paper obligation. We are constantly in deficit so SS payroll taxes go directly into the spending stream (even during the years when they massively exceeded outflows). An obligation is created that represents the debt owed to the SS Trust Fund from general revenue. Basically the same thing that happens when you or I buy Treasuries, or when the Thrift Investment Program invests in the G Fund, or when agency employee payroll deduction and agency contributions go into the CSRS and FERS retirement funds. I don't think this is a bad thing to the extent that we don't let things get completely out of hand. By many accounts we are not there yet but are working our way toward it.

 

[gerntz]

SS is like a pyramid scheme..

This is more accurate without the word "like".

 

[gerntz]

I heard on the radio today that SS will go broke in 17 years if nothing is done.

As long as anyone is paying in, it can't go broke. But it won't be able to pay all of its current benefits. That's not a problem for the Feds.

 

[Texas Proud]

I cannot believe all the people that seem to think that there is 'nothing' in the trust funds..

That is how debt works!!! When you buy a bond from a company, that company does not set your money aside so they can pay you back... they spend that money on something.... same with the gvmt.... All you people with Ibonds and T bill and any other treasury instrument is in the EXACT same boat as SS.... you have a promise from the gvmt (the general fund in the case of SS) to pay you your money when it matures...

SS has that same promise, and the general fund has been paying back every penny that it promised... why get in a tizzy because there is no 'money' set aside to pay it back

 

[Alan]

I cannot believe all the people that seem to think that there is 'nothing' in the trust funds..

That is how debt works!!! When you buy a bond from a company, that company does not set your money aside so they can pay you back... they spend that money on something.... same with the gvmt.... All you people with Ibonds and T bill and any other treasury instrument is in the EXACT same boat as SS.... you have a promise from the gvmt (the general fund in the case of SS) to pay you your money when it matures...

SS has that same promise, and the general fund has been paying back every penny that it promised... why get in a tizzy because there is no 'money' set aside to pay it back

Excellent explanation.

Am I right in thinking that in times of government shutdowns that repayment of SS bonds is prioritized ahead of other securities. e.g. The government would default on I-Bonds before it defaulted on SS bonds

 

[Texas Proud]

A comment on the OPs stmt...


Besides being against the law (which they could change if they wished) asomeone else mentioned, it is a zero sum game... whatever gains the gvmt gets is offset by losses from the general public...


Also, the gvmt has shown it is pretty bad at picking winners when it comes to stocks... now, they did make money on the banks who they forced to sell them stocks.... but lost with GM and I believe others... and their 'loans' have usually been a disaster...

It also would lead to corruption.... on a large scale....



As to the Bush proposal.... that was not allowing the SS to invest, but it was to create individual accounts like a IRA/401(k) that the individual could invest on their own (IIRC).... so the investment decisions would not be made by the SS people...



My last point would be that gvmt should stay OUT of business.... look at Venezuela.... they have 'invested' in the companies that are in their country (well, stolen to be more precise) and have run them into the ground..... gvmt has a different agenda than the private sector.... the two should be as separate as possible for the long term health of our country....

 

[euro]

A comment on the OPs stmt...


Besides being against the law (which they could change if they wished) asomeone else mentioned, it is a zero sum game... whatever gains the gvmt gets is offset by losses from the general public...


Also, the gvmt has shown it is pretty bad at picking winners when it comes to stocks... now, they did make money on the banks who they forced to sell them stocks.... but lost with GM and I believe others... and their 'loans' have usually been a disaster...

It also would lead to corruption.... on a large scale....



As to the Bush proposal.... that was not allowing the SS to invest, but it was to create individual accounts like a IRA/401(k) that the individual could invest on their own (IIRC).... so the investment decisions would not be made by the SS people...



My last point would be that gvmt should stay OUT of business.... look at Venezuela.... they have 'invested' in the companies that are in their country (well, stolen to be more precise) and have run them into the ground..... gvmt has a different agenda than the private sector.... the two should be as separate as possible for the long term health of our country....

Well said!

 

[Meadbh]

With a little google work I just discovered that the money we pay into social security is invested 100 % in treasuries. I remember in the early 80's when "they" redid the formula for full retirement age as i was affected. So this running out of money/ shortfall is not a new phenomena. So why not a little bit of equity exposure? Like a 50/50 or what ever the great economists think is best? Thanks for the info. Im going to google some more and see why this has not happened. I think this is a Nobel prize idea. I would think that even a 25 % equity exposure would solve things.

Legislation governs what SS can invest in. But legislation can be changed. In Canada, the sustainability of the Canada Pension Plan (CPP) became a concern in the 1990s. Then Finance Minister Paul Martin introduced legislation in 1997 and established the CPPIB (CPP Investment Board) at arm's length from government. CPPIB can invest in equities and real estate across the globe. To sustain long term pension liabilities it must achieve an ROI of 4%. In fiscal 2017 the net nominal return was 11.8%.

https://en.m.wikipedia.org/wiki/CPP_Investment_Board

Canada Pension Plan Investment Board Act

F2017 Annual Report | CPPIB | Canada Pension Plan Investment Board

http://www.cppib.com/en/how-we-invest/our-investment-strategy/

 

[Senator]

I cannot believe all the people that seem to think that there is 'nothing' in the trust funds..

That is how debt works!!! When you buy a bond from a company, that company does not set your money aside so they can pay you back... they spend that money on something.... same with the gvmt.... All you people with Ibonds and T bill and any other treasury instrument is in the EXACT same boat as SS.... you have a promise from the gvmt (the general fund in the case of SS) to pay you your money when it matures...

SS has that same promise, and the general fund has been paying back every penny that it promised... why get in a tizzy because there is no 'money' set aside to pay it back

Exactly. The SS trust fund is like you taking money out of your emergency fund jar, and spending it on your day-to-day lifestyle. You put a note in the jar to pay it back the money you took out. At some point, you think you will make the money back, and put it back in the jar. And maybe you pay back a tad bit more to pay yourself interest.

Since you did not have enough money to live within your means in the first place, you will never be able to live within your means. You keep taking the money out of the jar. When the last dollar is taken out, you have a problem. You do not have enough to live without the extra money that was subsidizing your lifestyle.

That is the social security problem.

 

[jollystomper]

My expectation is that SS benefits will be cut for some, but it will be done via some type of "means testing" formula.

 

[Blue Collar Guy]

From the AP, 4/5/2005: “A lot of people in America think there is a (SS) trust — that we take your money in payroll taxes and then we hold it for you and then when you retire, we give it back to you,” Pres. Bush said in a speech at the University of West Virginia at Parkersburg.
“But that’s not the way it works,” Bush said. “There is no trust ‘fund’ — just IOUs that I saw firsthand,” Bush said.

I have also read that the T-Bonds (IOU's) are special issue that cannot be sold to the the public.

ANY changes to SS are a political hot potato. The other side will always pick apart the ideas and suggestions of the opposition. There was a firestorm of criticism when letting people choose to invest part of their SS contributions in the market was discussed.

Funny, but food stamps, welfare, foreign aid and other spending categories are not subject to the "running out of money" rhetoric. The pols simply print or borrow more money.

wow, so there really is no money, just IOU's. Several members posted this. The treasuries are really special, hahahah.

 

[Blue Collar Guy]

Legislation governs what SS can invest in. But legislation can be changed. In Canada, the sustainability of the Canada Pension Plan (CPP) became a concern in the 1990s. Then Finance Minister Paul Martin introduced legislation in 1997 and established the CPPIB (CPP Investment Board) at arm's length from government. CPPIB can invest in equities and real estate across the globe. To sustain long term pension liabilities it must achieve an ROI of 4%. In fiscal 2017 the net nominal return was 11.8%.

https://en.m.wikipedia.org/wiki/CPP_Investment_Board

Canada Pension Plan Investment Board Act

F2017 Annual Report | CPPIB | Canada Pension Plan Investment Board

Our investment strategy

Looks like Canada is doing something like I suggested. Doesn't seem like its disrupting the economy.

 

[Hermit]

Looks like Canada is doing something like I suggested. Doesn't seem like its disrupting the economy.

So do a lot of State governments. Some it works OK for, others it has been a disaster.

 

[NavAir]

My expectation is that SS benefits will be cut for some, but it will be done via some type of "means testing" formula.

Exactly. Those of us that planned and invested for our retirements will be penalized to pay SS benefits for those that spent their money on booze and cigarettes, rather than saving for the future. One reason why I started receiving SS benefits at age 62, this year. At least some of what I paid in will come back to me...

 

[Senator]

wow, so there really is no money, just IOU's. Several members posted this. The treasuries are really special, hahahah.

Exactly. If the Government would cancel all the IOU's in the SS trust fund tomorrow, it would make no difference to the SS trust fund. Either way, the money paid out in SS payments are generated by current taxpayers. Not money coming in from the treasuries.

Even if the treasuries would produce income, or be allowed to be withdrawn, that withdrawal would also be generated from the current taxpayers (or printed).

 

[Senator]

My expectation is that SS benefits will be cut for some, but it will be done via some type of "means testing" formula.

Probably. It may even evolve into an asset test situation, like Medicaid. If you spend down your assets, you can then live a minimal lifestyle in government housing.

 

[Chuckanut]

My expectation is that SS benefits will be cut for some, but it will be done via some type of "means testing" formula.

There will be 'cuts', but, IMHO, they will be made via higher taxation of the benefits not a means test. Well, the tax rate will be based on one's 'means' so I guess we are both right. Other 'cuts' will be in in the full retirement age. I suspect my children will need to be close to 70 to get full benefits.

I have also read somewhere that the tables used to increase benefits on delayed SS are somewhat out of date and the aprox 8% yearly increase is a bit generous. So, I expect things like that to be tightened up. Just as they tightened up the rules allowing some of us to collect spousal benefits while our own SS increased until 70.

 

[Sunset]

There will be 'cuts', but, IMHO, they will be made via higher taxation of the benefits not a means test. Well, the tax rate will be based on one's 'means' so I guess we are both right. Other 'cuts' will be in in the full retirement age. I suspect my children will need to be close to 70 to get full benefits.

I have also read somewhere that the tables used to increase benefits on delayed SS are somewhat out of date and the aprox 8% yearly increase is a bit generous. So, I expect things like that to be tightened up. Just as they tightened up the rules allowing some of us to collect spousal benefits while our own SS increased until 70.

Yes, there are many small tweaks they can do if polliticians have the willpower that will solve the issue.
My neighbor gets to claim full benefits at 66, it used to be 65, I have to wait longer than him, they could keep doing this as 1 step.
Changing the tax-ability of SS from a max of 85% of your SS subject to tax, to 100% would be easy and only hit the "rich" folks. Why we get 15% of it tax free even when our income could be $24 Million per year is odd to me.
Of course increase the payments by 0.2% or some other small amount.

As they increase the FRA, from 65 -> 66.x -> etc, this solves the benefit increase from delaying to 70, as the delay time gets shorter.
Not that this is much of a problem as ~42% of people claim SS at age 62.

 

[Fedup]

The U.K. already changed their SS program so that the younger generations like my nieces won't get SS until age 70, IIRC. I don't think you can get SS early like 62 either. This is why it's even more important for my millenniums to contribute to their retirement account if they want to retire sooner.

 

[Alan]

The U.K. already changed their SS program so that the younger generations like my nieces won't get SS until age 70, IIRC. I don't think you can get SS early like 62 either.

You recall incorrectly, unless you can provide a better source to validate your memory.

Changes to State Pension Age | Age UK

Upcoming increases to state pension age

From 2019, the state pension age will start to increase for both men and women to reach 66 by 2020.

The Government is planning further increases, which will raise the state pension age from 66 to 67 between 2026 and 2028.

You can check your state pension age by using the Government's state pension calculator or calling Age UK Advice on 0800 169 2081.

You have never been able to claim early at age 62, or any age before full retirement age, so no change there. (You can choose to collect later similar to SS in the USA)

 

[GravitySucks]

Don't believe everything you hear on the radio.



The truth is not pleasant, but far less a doomsday apocalypse than the scare tactics from "go broke" headlines.







Without action, Social Security trust fund will be tapped out in 17 years - Jul. 13, 2017

+1,000,000
If people keep getting bombarded with this miss information it will be easier to suspend this social contract. I'm not sure how anyone benefits from ending SS, but there seems to be a concerted effort to erode or end the program.

As to the original question, Who decides what equities to buy? I wouldn't trust congress.

 

[Fedup]

You recall incorrectly, unless you can provide a better source to validate your memory.

Changes to State Pension Age | Age UK



You have never been able to claim early at age 62, or any age before full retirement age, so no change there. (You can choose to collect later similar to SS in the USA)

This is what I remember reading so I thought they did. Maybe it was scrapped after Osborne was forced out.
70 by 2060.

https://www.theguardian.com/uk-news/2013/dec/05/state-pension-age-raised-to-70-autumn-statement

And here is another one for the people Under 30 to 70. More recent article.
https://www.ft.com/content/634edc3a-1089-11e7-a88c-50ba212dce4d