Message Font: Serif | Sans-Serif
No. of Recommendations: 0

Social Security has been put into US bonds and notes.

Yes, and therein lies most of the problem, exactly.

>> 1. The cash went into the general treasury, in exchange for the bond, and the Congress proceeded to squander it. Now, the redemption of the bond will require general revenues -- that is, taxes levied on future generations.

>> 2. The bonds theoretically pay interest at the fixed rate of 2%, and thus historically have not kept ace with inflation. Back in the late 1970's and early 1980's, when inflation soared to 18% or so, these bonds were losing over 15% of their real value each year.

With regard to the latter, the Congress aggravated the problem by raising social security benefits without also raising the interest earned by the bonds so that those who paid into the system before that period and collected benefits after that period received payments that far exceeded their proportionate share of the assets represented by the bonds. The Congress also never adjusted the actuarial tables on which the benefits are based to account for the increase in life expectancy that has occurred over the past eight decades, further exacerbating this problem.

What would you have had them do?

The best approach would have been to invest the money in a manner analogous to a total stock market index fund, with dividends reinvested, and with a caveat that all stock held by the fund be voted in a manner that would be completely neutral to the outcome of the vote (so on a measure that required approval by 2/3 of the outstanding shares, 2/3 of the position would be voted in favor and 1/3 of the position would be voted in opposition). Such investment would have outpaced inflation over the long term (the market average returns exceed 10% per year, compounded), ensuring the solvency of the trust fund.

Print the post  


When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.