October 25, 2013


How to Make Social Security Last : If we're going to live longer, we'll need it more than ever. (Matthew Yglesias, 10/25/13, Slate)

Taxes are part of the picture, but one important idea should come to us from a now-forgotten aspect of the debate over the Bush tax cuts. Back in 2001, you see, then-Chairman of the Federal Reserve Alan Greenspan endorsed a large cut in taxes on the grounds that the federal budget deficit was becoming too low. Right now Social Security collects more in payroll taxes than it spends in benefits, in order to anticipate the eventual retirement of the baby boomers. But that Social Security surplus is invested in federal government debt. These investments produce a Social Security Trust Fund that in effect is more of an accounting convention than an investment vehicle. Greenspan warned that unless we cut taxes to increase the deficit, we might run out of debt for the Trust Fund to buy, and it would be forced to move into other asset classes, like owning stocks and corporate bonds. That, Greenspan warned, would lead to all manner of political malfeasance in the private economy.

With more than a decade of subsequent history under our belts, this looks like excessive fear of socialism pushing the country into unsound fiscal policy. And we should be open to the opposite conclusion. It's time to stop letting excessive fear of socialism block us from doing the sensible thing and investing Social Security funds in private assets. The spread of successful sovereign wealth funds from Persian Gulf monarchies and Singapore to Norway and even Canada shows us that it's workable in principle. And any investment adviser would tell you that an all-Treasurys portfolio is an exceptionally risk-averse posture--one that individuals or institutions with long time horizons should avoid. As the American government aspires to last essentially forever, it ought to have a fairly aggressive investment portfolio.

The concern that such a fund's clout would be put to bad political purposes ought to be addressed rather than simply used as a conversation-stopper. Rather than one gigantic fund, the government could create 30 smaller ones to which citizens are randomly assigned. Or the government could sponsor a discrete set of private funds run by existing investment companies and let citizens opt into the one of their choice. The name of the game is to avoid creating a single entity so enormous that it dominates the marketplace, while still taking advantage of the kind of scale enjoyed by major university endowments or small countries' sovereign wealth funds.

Why 30 too powerful government entities when we could have 500 million individuals with their own funds?

Posted by at October 25, 2013 6:15 PM

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