fact finding on social security 1
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About the Author
Morningstar columnist Mark Miller writes about
trends in retirement, aging, and the economy. He
is the author of The Hard Times Guide to
Retirement Security: Practical Strategies for
Money, Work and Living, and writes a syndicatedcolumn for Reuters. Mark blogs at
RetirementRevised.com Twitter: @retirerevised.
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Fact Finding on Social Security
Retirement columnist Mark Miller responds to reader feedback about
his recent Social Security myths commentary.
By Mark Miller | 09-14-12 | 06:00 AM | Email Article
"Facts are stubborn things," John Adams said in 1770. My recent Morningstar
column on myths and facts swirling around the Social Security system stirred quite
a bit of passionate political debate, judging by the comments posted to the article.
But even amid stark
disagreement, at the core of
the system are certain facts
that can be useful to any
investor trying to understand
Social Security and where it
fits into his or her retirement
plans. Several aspects of the
program are worthy of debate,
and by clarifying the facts, I
hope to make those
conversations more productive.
In that spirit, and in response to some of the most interesting comments from
readers of my first article, here are some further facts on Social Security.
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I.O.U.s
Social Security critics argue that the Social Security Trust Fund is an accountinggimmick because its assets have been lent to the government via special-issue
Treasury bonds. I pointed out that the bonds are "full faith and credit" obligations
of the government--therefore, they are real assets.
"How can you possibly believe that the special-issue bonds represent real assets?"
writes John Dewey in a typical response. "The special-issue bonds are nothing
more than IOUs from one part of the government (the taxpayers) to another.
There is nothing in current law that requires these bonds to ever be redeemed."
In fact, under federal law, the financial assets held by the retirement and disability
trust funds can be used only to meet the obligations of these programs. (See
Section 201(d) of the Social Security Act.)
It's also important to understand that the special notes aren't just sitting in a
vault--they are being redeemed regularly. Steve Goss, chief actuary of the Social
Security Administration, describes the process:
"New bonds are purchased every day from the revenue coming into the
government, and they are credited to the trust funds. Similarly, whenever any
money is expended from the trust funds, for benefits or for any administrative
expenses, this comes from redeeming bonds. So, bonds are issued and redeemed
all the time.
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"This is significant because there is a strict rule on the priority order for
redemption of bonds. Anytime a bond is redeemed, we redeem from among those
bonds with the shortest remaining duration to maturity, and redeem the bond from
that group that has the lowest interest rate. New bonds issued are always issued
with an interest rate compounded semiannually at the average effective market
yield determined by the Treasury Department at the close of the prior month for all
outstanding marketable Treasury securities that are due or callable four years or
more in the future. We also have specific procedures for the term of bond issuesand the date of rollover."
Although most trust fund assets are held in the special Treasury notes, Goss says
that the key legal requirement is that the funds be invested in interest-bearing
securities "backed as to principal and interest by the full faith and credit of the U.S.
government."
The trust funds don't have to invest solely in special-issue bonds and have not
always done so in the past. "Marketable Treasury securities and some mortgage-
backed securities also qualify, but none are held by the trust funds currently," he
says. For more on this, see Social Security Administration actuarial note 142--the
first memo on this page.
Why doesn't the trust fund also invest in corporate bonds or stocks? Politics.
When the Social Security Act was passed in 1935, the original intent was to invest
in al l kinds of private-sector assets--an idea that sparked resistance from
conservatives, who disliked the socialistic implications of having the government
invest directly in the private sector.
Senator Arthur Vandenberg, a Michigan Republican who was a key opponent of
most aspects of the New Deal (but did support the creation of Social Security), wasconcerned that the large trust fund Social Security was expected to build up would
result in a kind of socialism.
"He had a somewhat famous exchange with Arthur Altmeyer, the first chair of the
Social Security Board, in which he asked Altmeyer what the trust fund assets
might be invested in," says Eric Laursen, author of The People's Pension: The War
Against Social Security from Reagan to Obama. Altmeyer replied, in 'social
undertakings such as . . . low-cost housing, schools, hospitals,' and even in
manufacturing 'that could be justified from the point of view of social welfare.'
"That scared the bejeezus out of Vandenberg, who went on to insist that the trust
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fund be shrunk and invested in Treasury bonds."
We're All Greek Now
Some readers just aren't buying my argument that Social Security can't bankrupt
the federal government because the U.S. government has the power to tax and
print money, unlike the troubled Mediterranean country that is the poster child of
the European sovereign debt crisis.
Inspectorgadget 's comment is typical of the thread: "Essentially [Miller] says, in
several different ways, 'Don't worry, the government owes Social Security all this
money, future taxes can be raised to cover Social Security.' That's the problem,
isn't it? Taxes on whom? On the shrinking workforce to pay for a growing retiree
population? Has this expert looked at the newspaper lately to see news about
Greece (for example), to see where this leads?"
Of course, Greece is a eurozone country, at least for the moment--which means it
is in a monetary union and can't make decisions on its own to print money.
Furthermore, financial markets don't seem to share the reader's concerns.
Ten-year U.S. Treasury notes are yielding about 1.6%--not far off record lows andhardly a rate that any sane investor would accept for 10 years from a borrower
that is headed for bankruptcy. Compare that to recent 6.8% yields on the 10-year
notes of Spain, another stressed eurozone country.
This is not to dismiss the long-range importance of the debt problem for the U.S.
economy--or the inflationary risks inherent in printing money. But the option to
inject liquidity into the market does mitigate the crisis notion of a sudden
bankruptcy where debts cannot be repaid, as we are seeing in Greece and Spain.
Moreover, the market itself is not pricing U.S. sovereign debt anywhere near crisis
levels.
China Syndrome
I argued that Social Security isn't, per se, a contributor to the national debt. In
fact, the program is a lender, not a borrower. Just like the Chinese.
"The truth is that to say Social Security will not be a major, and growing,
contributor to the national debt is simply intellectually dishonest," writes
damich44. "The Social Security Trust is the single largest creditor of the U.S.
government, and it isn't close."
My point on this is simple: debt obligations are debt obligations, whether they are
to a sovereign foreign government or to Social Security. And remember--an
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Comments 1-10 of 61 Comments
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obligation to Social Security really is an obligation to the American people, who
have "lent" their FICA tax contributions to the government--tax contributions that
were made with the promise that they would be used to fund their future Social
Security benefits.
Social Security's old-age and disability trust funds currently hold $2.7 trillion in
bonds. As of June 2012, the two biggest sovereign holders of U.S. Treasury
obligations were China ($1.164 trillion) and Japan ($1.119 trillion). At $5.292trillion, all foreign sovereign debt holdings dwarf Social Security's holdings.
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SteveM
Sep 14 2012, 6:15 AM
Flag
Mark, you are either a very brave man or a glutton for punishment
to wade into these waters again :-)
kayaker
Sep 14 2012, 7:13 AM
Flag
I just flagged Mainstreet100 as inflammatory - if everyone who has
gone through Medicaid and a nursing home process with a relativedoes the same maybe we can get this ignorant, cruel and insensitive
remark removed.
Mainstreet100
Sep 14 2012, 7:28 AM
Flag
While some right wing philosophy may have intellectual basis most
of it is propoganda fed to parts of the lower class that mysteriously
supports them in the face of what is not best for themselves, at least
financially. I often wonder why? I guess they hate minorities and
are religiously brainwashed about women rights so much that it
overcomes the fact that they will never be the person to benefit
from the economic agenda espoused by the rich. They actually
believe that the freeloaders in our society pay no taxes and that
robs them when they often are un or underemployed and pay little
tax themselves while relying on the benefits they decry. Watch out
right wing if they ever wake up.
capecod
Sep 14 2012, 7:36 AM
Flag
There is no way to overcome the loud, adrenalin-soaked,
hair-on-fire (and sometimes purposeful) misunderstandings about
social security, the national debt, and taxes that have been sparked
and fanned by a decade of the radical politicization of everything in
our society. Facts no longer matter.
yrag46
Sep 14 2012, 7:40 AM
Flag
Mainstreet100..... To the point and well put.
Mainstreet100
Sep 14 2012, 7:41 AM
Flag
Kayaker
I think you misunderstand my post. I am sure that process is soul
draining and was not directed to those that have to do it. It was
directed to the hypocrisy of those that take advantage of it who do
not have to while espousing philosophies ignoring the poor.
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academic
Sep 14 2012, 8:41 AM
Flag
Mr. Miller describes some details of the mechanics of the SS Trust
Fund to argue that it is an "asset", but none of these details address
the key issue: the existence of this fund does not change the net
financial position of the US federal government at all.
At best, you could try to argue that the trust fund is an accounting
mechanism to determine how much taxpayers "owe" Social
Security. But even that is not correct. The Supreme Court has ruled(e.g. Flemming vs. Nestor, 1960) that Social Security is not a
contractual obligation to SS taxpayers. Rather, it is a spending
program that Congress can revise at any time as it sees fit. So
according to the law, Social Security does not "owe" future
beneficiaries anything. Congress could, if it wished, reduce benefits
at will and never redeem a dime of the "trust fund."
In the setting of these benefits, the trust fund will play at best a
minor role. Yes, its existence will provide some ammunition to
argue in favor of maintaining benefits when SS taxes fall short of
benefits. But it's just a fact that Congress bases its decisions almosttotally on demand from constituents for higher current benefits and
lower current taxes, not rational long-range financial planning.
The only relevance of the "Trust Fund" is that it plays a small role in
the purely political decision of how to adjust benefits in the future.
Other than that, it is meaningless and irrelevant.
polkster0
Sep 14 2012, 8:44 AM
Flag
Mark, how then do you explain President Obama's statements
during the debates over raising the "debt ceiling" last summer? On
several occasions Obama said that if we didn't raise the debt ceiling
by the required date, "we might not be able to send out Social
Security checks". If there are actual assets in a Social Security trust
fund, why would the president of the US say something like that?
Does he know something you don't?
capecod
Sep 14 2012, 8:51 AM
Flag
Yes pollster.....as Treasury cash balances approached zero because
it needed to continue making contractual payments but could not
borrow, its lack of cash would ultimately have made it impossible to
redeem the Treasury debt in SS to supplement or make cash
payments to SS beneficiaries. See, it really isn't the conspiracy
theory of everything if you actually bother to think it through....of
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course, if that's too much of a challenge....
colorado43
Sep 14 2012, 10:27 AM
Flag
Mark, What has been the fund's real investment return to recipients
on their contributions?Like every other investment, the real return
is calculated by adjusting for inflation.
How will today's low Treasury yields influence the real return?
1-10 of 61 Comments
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