By Larry Leonard
(Original posting, November 1, 2010 — Updated 8/21/12)
Does Social Security have dedicated assets invested for my retirement?
Social Security is largely a “pay-as-you-go” system with today’s taxpayers paying for the benefits of today’s retirees. Money not needed to pay today’s benefits is invested in special-issue Treasury bonds.
(OMED: so who pays when one of these “special issueTreasury bonds” are cashed in? France? To be more precise, who pays when any government bond is cashed in? That’s right. The government. And where does the government get the money to pay anybody for anything? This particular “investment” is what we call “Robbing Peter to pay Peter.”)
Is there really a Social Security trust fund?
Yes. Presently, Social Security collects more in taxes than it pays in benefits. The excess is borrowed by the U.S. Treasury, which in turn issues special-issue Treasury bonds to Social Security. These bonds totaled $1.5 trillion at the beginning of 2004, and Social Security receives more than $80 billion annually in interest from them. However, Social Security is still basically a “pay-as-you-go” system as the $1.5 trillion is a small percent of benefit obligations.
(OMED: Since FDR’s lock box was opened by President Lyndon Johnson, and the Democrats who controlled both houses of Congress at the time, it is not the same lock box it was. For decades it has been a source of “funding” for “social programs” of the Democrats and your odd RINO. They tell you there are Treasury Bonds in there, so no money is actually gone. For years, people chose to believe that, ignoring the fact that your taxes are used to pay the interest you “earn” on the bonds exchanged for your money in the lockbox in the first place. In this piece, you will soon see that there actually has been investment of (some people’s) SocSec payments in private economy finds, like the S&P 500. Mutual funds of various types. It usually works quite well, as you will soon read. But, an “investment” in a T-Bill is a sham, because this is the only kind of investment where the purchaser is taxed to generate his own profit. It is insanity.)
Most of the questions and answers in this section are from a social security faq page. (The ones with the tag, OMED) are text from this magazine. Below, as we identify just who got special treatment, you will see some of these points repeated.)
The Lesson of Thrift OMED: Okay, now to an earlier OrMag piece, part of which had to do with the creation of SocSec accounts which do not all automatically go into the “general fund,” like yours do. Who is it that receives this “special” type of treatment? One guess …
Critics of the Bush administration plan to reform Social Security with personal accounts have a seemingly endless supply of reasons why it can’t possibly work. You know the litany: It’s too risky. It’s too expensive. It’s too complicated. The critics never mention that there’s already a government-administered retirement system that has shown for over 15 years that personal accounts are prudent, inexpensive, and simple. It’s the …
Thrift Savings Plan of the United States federal government
… which is currently serving 3.3 million government employees.
The years since Thrift was first offered in 1987 couldn’t make for a better laboratory to crash-test a personal-account system. During this period there have been both bull and bear markets that were among the most severe in history. Through year-end 2003, investments in Thrift personal accounts have earned $44.4 billion in profits for system participants — an average of more than $13,000 per participant.
Over time and on average, 65 percent of the value of Thrift participant accounts has been invested in a special money-market account operated by the U.S. Treasury. That’s been responsible for about $20.3 billion of the total investment gains. But almost as much — $19.8 billion — came from an S&P 500 Index fund. That’s remarkable because, on average, only 30 percent of the value of participant accounts has been invested in the S&P 500 fund.
This is a textbook lesson in why it makes sense to invest in equities. Even though they are riskier in the short-term, they have a higher expected return in the long-term — if by your votes, you haven’t allowed Democrats and RINOs to ruin the private economy. That’s why the S&P 500 fund has earned just about as much for Thrift participants as the plan’s money-market account, with only half the money invested.
And index funds are cheap to operate. As I discussed in detail in my column last week, investment management fees for index funds are ruinously small for the managers. And speaking of cheap, Thrift is a model of efficiency. Its administrative costs are only about six one-hundredths of 1 percent of invested assets. That compares especially favorably to Social Security, which has administrative costs that are more than five-times greater, even though you’d think its vast scale would lead to significant economies.
Index funds also have the advantage of being very resistant to meddling by government bureaucrats. Critics of personal accounts complain that any government-sponsored retirement system creates an irresistible temptation for politicians to guide participant dollars toward favored investments, or for politicians to grandstand by interfering with corporate governance.
Indeed, all those things have happened in large pension plans sponsored by state governments. But there’s never been a whiff of it at Thrift. That’s because investment in simple index funds is clearly mandated in the legislation that created it — it would take an act of congress to permit a bureaucrat to funnel Thrift money into some pet investment.
The Thrift Savings Plan proves that there’s nothing too risky, too expensive, or too complicated about personal accounts for Social Security. More than that, since the Left (Democrats) are presenting this approach as threatening abuse to the elderly, since they use the program for themselves, and have for decades, the warning they are trumpeting is pure hypocrisy.
© 2010 Oregon Magazine