What would happen if we moved social security funds into low risk investments

[Wesley_Clark]

I was watching Forbes on fox last night and Steve Forbes said that a small town somewhere, maybe Texas, opted out of conventional social security a few decades ago and decided to invest SS money into low risk/no risk investments like bonds, T bills and CDs. He said that the average recipient got 50-200% more SS benefits than those who live under the current redistribution scheme which has no investments as far as I know.

So is this a good idea for social security, investing it in low risk investment? What would happen if you started putting in and taking out $500 billion a year into banks, government bonds and CDs? Would that lower interest rates on personal and corporate loans and boost the economy or anything? Would investing in stable, low risk investments other nations taht we had a stake in the success of be a good idea too (like if Japan’s economy was floundering and the US invested $200 billion in Japanese banks so Japan could make lower interest loans, get a stronger economy and buy more american goods)?

[David_Simmons]

In effect, Social Security funds are invested in US Government securities. The money is used to pay Social Security benifits and the surplus is used in general operations and a notation is made to the effect that the US Treasury owes the Social Security fund X dollars. I don’t know whether it is at a fixed interest rate or is at the rate for US securities in effect at the time when the money is borrowed.

[aahala]

@Wesley Clark

So is this a good idea for social security, investing it in low risk investment? What would happen if you started putting in and taking out $500 billion a year into banks, government bonds and CDs? Would that lower interest rates on personal and corporate loans and boost the economy or anything?

Not much net change, because if the annual social security surplus were invested elsewhere rather than financing the government, the government would need to borrow the same amount somewhere else.

[Blalron]

@aahala

Not much net change, because if the annual social security surplus were invested elsewhere rather than financing the government, the government would need to borrow the same amount somewhere else.

Exactly. Where do you think the money comes from to pay off treasury bills? Taxes.

[Kimstu]

WC: *Steve Forbes said that a small town somewhere, maybe Texas, opted out of conventional social security a few decades ago and decided to invest SS money into low risk/no risk investments like bonds, T bills and CDs. He said that the average recipient got 50-200% more SS benefits than those who live under the current redistribution scheme which has no investments as far as I know. *

This soundbite leaves out a good deal of important information about the so-called “Galveston plan” (under variants of which the three Texas counties of Galveston, Matagorda, and Brazoria opted out of Social Security for its public employees in the early 1980’s). A 1999 Pension Research Council report (PDF) on the Galveston plan points out that

*n general, the Galveston Plan offers higher initial benefits than Social Security to workers with higher earnings and/or in cases where there are no dependents that would qualify under Social Security.

Social Security tends to offer higher initial benefits than the Galveston Plan to workers with lower earnings and/or to families with dependents who qualify for Social Security benefits. Although many of Galveston’s initial benefits are higher than Social Security’s, they are not indexed to inflation and lose value relative to Social Security’s over time. Galveston’s Plan does not have a waiting period for coverage (full coverage begins in the first pay period of employment); it offers more pay-out options (lump-sum or various annuities) than Social Security; and, in general, provides higher benefits to those with higher earnings and/or those with fewer dependents who would qualify under Social Security.

Furthermore, under the Galveston Plan, contribution rates (payroll taxes) are higher than under Social Security; there is a risk of outliving one’s benefits under certain pay-out options (lump-sum or fixed annuity); there are no additional spousal or dependent benefits (benefits are based entirely on contributions); benefits are paid to a named beneficiary and there is no guarantee that benefits will be provided to a spouse/divorced spouse or dependent child; benefits are not portable to future employers; benefits are not adjusted for inflation; and, in general, benefits are lower for those with lower earnings and/or a greater number of dependents who qualify under Social Security.

Note also that as of 1999 there were fewer than 1600 participants (both currently contributing and currently receiving benefits) in the Galveston system (and, I presume, comparable numbers in the Brazoria and Matagorda plans, meaning only around 5000 total participants). Note also that the plan applies only to public employees, most of whom have much better job security and much better wages than the lowest-paid participants in Social Security.

Note furthermore that the higher pay-outs are funded partly by a higher contribution level on the part of the employer (7.8% pre-tax payroll contributions from Galveston County, as opposed to 6.2% contributions from employers to regular Social Security). In part, those juicy extra benefits for those Texas public employees are funded by extra taxes on their neighbors.

In summary: Read the fine print. Private plans based on a small number of participants who, as public employees, are somewhat “cherry-picked” from workers in general (since they tend to have relatively stable employment and good wages) may look like a better deal than SS on the surface. But they should be examined very carefully before concluding that they’d actually do a better job as social insurance for the whole of our workforce.