Something occurred to me the other day: If a portion of Social Security savings is to be diverted into private accounts, won’t this likely increase holdings in Treasury bills and dollars? Since we’re essentially creating new savings, and presumably a bunch of the savings accounts will have/be required to have holdings in “safer” funds like Treasuries and cash. In the end, Americans might end up owning a greater portion of our national debt than they do now.
Of course, filling the shortfall his scheme will create is going to require massive deficit spending … so how does that all figure into it? Will the new savings accounts basically just be buying up the newly created debt?
Interesting theory, diverting the money to treasuries would be just like buying war bonds.
As for the deficit issue in general, I’m more worried that our ideological enemies Communist China will quit soaking up all our low-interest T-Bills and interest rates will go way up. This we don’t need.
That’s what started me on this train of thought. Could this be a viable way to tip the share of ownership of US debt away from foreigners and back toward US citizens? Or is it the case that (a) the amt. of new investment this would create would be utterly negligible in the grand scheme of things or (b) the new debt created to finance the switch to the new “ownership society” would likewise derail any benefits?
Holding everything constant, which of course is not going to happen, here’s the deal.
Social security revenue will go down by the amount of the diversion into the private savings accounts. The debt instruments issued by the government to the Social Security Trust fund will go down by the same amount and this amount will be added to the amount government must raise through public debt sales.
A portion of this increase in public debt will end up in the private accounts, a portion by other American corporations, banks etc and a portion by other foreign investors.
So the total held by Americans will go up and so will the total held by non-Americans.
I’m not positive, but I believe the so-called interest rate government is accuring on the special issues to the Trust fund is simply copied from the public auction. There’s hardly any other way to do it. Under the private retirement plan, the net revenue reduction would have to be sold in public auction; adding billions to the auctions may have an adverse effect on the rate government must pay.
I think it’s logical to assume that many of the accounts will hold Treasuries, at least in part. I don’t see why any of them would be cash, however. This wouldn’t allow for any interest on the money. Using your money to work for you with compounding interest is the main reason to allow privatization of social security in the first place.
I disagree that privatization will require massive spending. If done gradually, then the system can absorb the transfer of people out. By letting me out of the regular social security plan now you lose some revenue. But this is only in part. Any privatization will most likely only be partial amounts of what we are paying in. Then when I retire, I will have my own fund of money that has grown larger than anything social security can hope to provide. The system doesn’t have to pay me a cent. I’ll be better off with my own nest egg that I control. Since I paid into the system without collecting out, I helped to subsidize all those too foolish to invest for themselves. But, I am keeping the system alive by paying in and not taking out.
Privatization can actually fix the shortfalls of social security and prevent deficit spending from being required to bail out the system.
If you hear someone say they know the exact net effect will actually be, you are either talking to the smartest person who every walked this planet, or a complete idiot. I know I’m not the former and hope I’m not the latter.
Especially this early in the process, with no plan on the table!
But within that (HUGE!) constraint, aahala has the best answer available about the specific effects wondered about in this OP. About the only addition I’d make is that the interest credits to the SS “trust fund” are not monetized, they are only credits. With real government bonds owned by individuals, whether in a SS-spawned fund or otherwise, the interest and principal must be funded with real money which can be diverted into other investments. From the government’s perspective this is no biggie, ceteris paribus – borrow the money and wire it to a bondholder, credit an account same same. But it will certainly produce other monetary imbalances in other places as assets seek their most productive uses. I do not have a current view as to what effects this would necessarily have, but note it for the interested.
Excess money from Social Security is already being used to buy T-bills. So if some of SS is privatized, fewer T-bills will be bought overall, forcing the government to sell T-bills in other ways, which would mean a portion of that would wind up in foreign hands.
But if all the money in private SS funds is used for T-bills, it would be a wash, the only difference being that the T-bills wouldn’t be owned by SS, but by individual SS accounts.
At the moment i believe SS owns about $1.6 trillion in T-bills.
Do the “treasury securities” in the “trust fund” currently earn interest? If so, is this interest anything more than just a bookkeeping entry? I know that the return on SS contributions is nowhere near the 10 yr treasury bill rate, and some anti-privatization info I’ve seen claims the total overhead is less than 1% (which I believe, based solely on the massive amounts of money involved- 1% would be into 9 or 10 figures).
Well, if you want to split hairs, the retirement portion of the trust owns zero T-bills.
The entire assets are “special issues” and a small amount of cash. The other part, the disablity/insurance portion does own a very few treasury securities, a small amount of cash and mostly “special issues”.
They are “special” because these things can only be issued to the trust fund and can be sold to anyone, as long as the buyer is the government.
The interest is of course paid by additional “special issues”. Now that is special.
