The Real Social Security Problem

bill clintonTFull Faith and Credit of the United States of America: To the world we are the best return on and the safest place for investment. The US Dollar is functionally the base currency for the entire world. One could make a case that the dollar has created an empire, backed by both the Full Faith and Credit of the United States, the full power of our military, industry and espionage apparatus. It’s the largest, most powerful and relatively the most peaceful empire in the history of the world. But here’s the dirty little secret; while we, the United States, pay our bills, we don’t pay our debt!

Since 1929, we have steadily built a National Debt that is as large and impressive as our empire is vast. The Federal Debt was a modest $17 billion in 1929 and more than doubled to over $40 billion by 1939. Then the real spending began. The US debt grew to a staggering (for the time) debt load of over $253 billion. In today’s scale – our federal debt would have to be in the neighborhood of $24 trillion to rival the 1949 Federal debt as a percentage of the GDP.

Since the end of World War II, only one president, Bill Clinton, has managed to shrink the Federal Debt by working with Congress to cut spending and increase tax revenues. (Incidentally, the economy grew in the final years of President Clinton’s term reducing the Debt to GDP Ratio.) If you drill down into the numbers the primary reasons why the federal debt has ballooned are generally twofold: tax cuts and defense spending. There have been increases to the federal debt that can be blamed on economic downturns that reduce tax revenues, as well as economic stimulus and health care costs but since 1980, the primary drivers of the increase in the Federal Debt have been tax cuts and defense spending.

So why are the primary discussions around reducing the Federal Debt focusing on Social Security? Since its inception in 1937 through 2009, Social Security has run a yearly surplus 51 of the 62 years. The deficit years occurred in the late 1950’s, early 1960’s and from 1975-1981. The total accumulated surplus is currently over $2.5 trillion! The problem with the Social Security is not a Social Security surplus, it’s that huge deficit! Wait – a $2.5 trillion surplus is a problem? Not all by itself, but the problem is the US Congress spent it and left an I.O.U. at interest. And that interest will hit the federal balance sheet.

What’s worse is that we are fast-approaching a time when Social Security will have to access that surplus and because Congress spent it, not only does the US Government owe that surplus plus interest to the American people, Congress will have to borrow more money, at more interest to pay off the money they already borrowed, at interest. So instead of having that discussion at all, we hear how Social Security is a problem and has to be “fixed.” Imagine you lent someone your retirement money and they spent it and now had to borrow money to pay you back and instead of paying you back they began looking at radically renegotiating the terms of your loan so as not to have to pay you back!

If this situation weren’t so tragic it might be funny. But the real tragedy is the solution is ridiculously simple – if not for politics. First, in the words of Bill Clinton – it’s math. We may have to adjust the cap on the portion of income that contributes a percentage to social security. This will maintain a surplus. Second, Congress must give up its ability to borrow the surplus.

So what to do with the surplus? You can’t just let it sit there. The stock market might look like an option but it is probably way too risky, especially given the rise in risky financial instruments like credit default swaps that now seem to dominate that market. Perhaps the best place to invest the American retirement system’s nest egg is America itself.

A “Social Security” bank or Credit union could invest in State and Municipal Bonds and qualifying small businesses, student loans and mortgages. What better and more secure place for Americans to invest than Main Street? Such an investment program would not only help Americans it will also stimulate the economy and provide a revenue stream from the Social Security surplus for Social Security.

Bill Gerencer

Friday, 31 May 2013

Leave a Reply

Your email address will not be published. Required fields are marked *