Government Investing Social Security Funds

Right From the Start

Monday’s Wall Street Journal (April 10, 2017) carried competing opinion pieces regarding “Should the Social Security Trust Fund Be Allowed to Invest in Stocks.”  It is an interesting debate that surprisingly finds the left supporting stock market investment and the right damning the idea.  The left – well not all of the left but those who actually “think” rather than “feel” – acknowledge that there is no way that the current investment of the Social Security Trust Fund in unsecured federal government bonds can ever pay the current $32 Trillion of unfunded future liability.  The right, while acknowledging that investment of at least a portion of the social security funds in the stock market is a better choice for beneficiaries, argues that the sheer size of the Social Security Trust Fund would distort the market and give the government too much influence over private companies in which it might invest those funds and, therefore, resists the government making such investments.

I believe those on the right have the better argument. Previously, I have written columns demonstrating how much better Social Security beneficiaries would have been if they – not the government – been allowed to make the choice of investing a portion of their contributions in the stock market instead of the current system which allows the federal government to loot those contributions in return from a vague and unenforceable promise to meet benefit payments that are neither “earnings determined” nor actuarially sound.  (May, 2005 and January, 2017)  But those arguments assume individual choice not government dictate.

The recent decision by the Portland City Council to divest itself of investments in Caterpillar is proof positive of the abuses that can and will be used by government – particularly when government is controlled by “progressives.”  Why is the Portland City Council upset with Caterpillar?  Because Caterpillar equipment has been used in the construction of buildings, walls, and barriers by Israel as part of the Israeli-Palestinian conflict – an issue of critical importance to an overwhelming minority of  “snowflakes” who drive the political agenda in Portland, and an issue of zero importance to the overwhelming majority of the rest of Portlanders who actually have to pay for this foolishness.  It is the same kind of nuttiness that drives investment decision making in California, Massachusetts, and major colleges who are hell bent on using somebody else’s money to support their political agenda.

Be that as it may, the question posed in The Wall Street Journal is for all intents and purposes moot – it will never happen.  And it will never happen precisely because the federal government needs the money extracted from workers and employers under the Federal Insurance Contributions Act (FICA).  That’s right.  The federal government takes every last dollar – every last dime, every last penny – contributed by future beneficiaries of the Social Security System and spends it on the plethora of federal programs, including welfare programs and military programs.  It is, in essence, a slush fund for the government’s general fund.

And the federal government likes access to that money because it is interest free.  That’s right – interest free.  In exchange for taking that money the government commits to a vague promise to make current payments to Social Security beneficiaries.  It is a promise that can be altered, amended or abandoned at the whim and caprice of Congress.  Given the current national debt of nearly $20 Trillion dollars – not including the unfunded future liability of $32 Trillion for Social Security and the unfunded future liability for federal pensions of $7 Trillion (add $3.5 Trillion for other benefits to federal employees) – it is relatively certain that Congress will make those changes.

Without access to that free money from the Social Security Trust Fund, the Congress would be “required” to raise taxes or further increase the national debt in order to maintain “current funding levels.”  (Current funding levels (CFL) means using the last approved budget increased by inflation, population expansion and other factors.  Congress tells us that it is necessary in order to maintain the status quo – but it doesn’t because CFL results in total funding increases in excess of inflation and population expansion.)

Baloney, there isn’t a single federal budget that cannot be reduced without effecting services.  But that isn’t even what is called for here.  A simple limitation on budget increases to all federal agencies (with the exception of the military) equal to the same inflation percentage used in calculating the annual increases in Social Security benefits to Social Security beneficiaries coupled with a five to ten percent actual reduction in administrative costs would, in short order, reduce and then eliminate the need for Congress to access funds generated by FICA.  At that point the government could give beneficiaries and future beneficiaries the option to invest a portion of the funds in the stock or bond markets at their discretion.  In doing so the unfunded future liability for the Social Security Fund would be reduced, and given the long term proven performance of the stock and bond markets the benefits to current and future beneficiaries would be increased.  Please note that I have said “give beneficiaries and future beneficiaries the option.”  That means not only does each beneficiary or future beneficiary have the option whether to invest but also in what to invest.  The federal government should have no role in those investments because of precisely what was noted earlier in this column – investment by a single entity as large as the federal government would distort the market, and the probability that the government would invest for political purposes rather than for maximizing return.

But, as I noted earlier, the whole discussion is moot because the government wants free access to the Social Security Fund and neither your opinion nor mine matters a fig.
  • Bob Clark

    I like all of the suggested changes to Social Security here, although I would be inclined to limit the stock market portion of an individuals SS investment to like 10 percent for 50 year olds and older and 25% for younger folks; plus limit the stock market investment to an index of all U.S stocks.
    I’ve witnessed to many folks pull their monies out of stocks when the stock market has collapsed only then to put the monies back in when the stock market is peaking or never get back in. If you don’t also, limit the stock investing to a broad base of stocks then you have investment sector fads taking over and again individuals have proven to be prone to these fads.
    Historically, there’s seems to be maybe a spread of as much as 5% per year between general stock market index and “risk free” U.S Treasury bonds on average over ten to twenty year time periods. So, for fifty plus somethings you up their SS returns by maybe half a percent per year or so. And for young uns, you boost SS returns by maybe one and half percent per year. Over the course of a career that boosts total retirement account balances by perhaps as much as half again.
    And the risk with broad based stock market index and longevity of stock market investment component plus the imposed limits on percentage investment in stocks pretty much erases risks of bad underperformance relative to current regiment.

    • Oregon Engineer

      And who made you supreme ruler over how much a specific age group should be allowed to invest? What part of “give beneficiaries and future beneficiaries the option” and :The federal government should have no role in those investments” did you not understand? What you suggest is government lite and we already know that does not work.

      • thegreatpeon

        On that line of thinking, the better option yet would be to get the Federal Government out of the retirement business altogether. There is no Constitutional authority for Social Security to exist in the first place.

        • Oregon Engineer

          That’s my point. the counter argument is “but, but, what about the elderly poor. they will starve in the cold and dark without SS.” and the answer is continue them on the welfare programs to which they have become accustomed.