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President Bush has opened the door to new ideas on how to change Social Security, a fixture of American politics for the last seventy years that he seems intent on dismantling, at least in part. Well, liberals should not feel abashed at putting forward some progressive options.
I suggest moving Social Security away from its insurance role and towards a pension plan model. I would use CALPERS, the country’s largest public pension plan as a framework, although with more oversight and less risk. That said, it is important to know that CALPERS’ annual rate of return for the last ten years has been 9.7%, as compared to 5.6% for the Social Security Trust Fund. CALPERS invests in a wide range of domestic and international investments, including stocks, bonds and real estate. While it is invested 60% in stocks, I would suggest the Social Security Pension Plan (SSPP) be invested 50% in T-Bills, and the balance in other assets.
A Social Security diversification plan should allay one of George Bush’s primary stated reasons for reform: Existing returns are not adequate to fully fund benefits beyond 2044 (2055 if CBO estimates are used.) At a return of say 6.5%, as a result of a more aggressive investment strategy, the trust fund would be fully funded for the next 75 years, based upon the Social Security Administration’s demographic projections.
Allowing the Trust to invest in private equities and other investments could have other social benefits. For one, as CALPERS has managed to yield tremendous power in demanding good governance from companies it invests in, the SSPP would have by virtue of its larger wealth even greater say. Given the rash of corporate scandals over the last few years, direct oversight by a large government agency would create comfort for many private investors, who then would be willing to get back into the market.
This spreading of good governance could extend offshore as well. Much like CALPERS was one of the first investors to stop holding positions in companies that did business with apartheid South Africa, the new SSTF could be an instrument of freedom around the world. A policy of "Bucks not Bombs."
Allowing the SSPP to invest in other assets will also put tremendous pressure on the real culprit of financial mismanagement: The federal government. Without the safety net Social Security gives congress and the White House that the first $150 billion (more in later years) of deficit will be absorbed, they will be more inclined to keep their books in order. Moreover, with a starting nest egg of $1.6 billion, the SSPP is possibly sufficiently funded that it will not need repayment of Treasury Notes down the road, just the interest, which will eliminate the worry some people have that repayment of these bonds will be a dangerous burden to the federal government.
To avoid either political party gaining advantage of the trust, it should be granted greater independence, with an independent council of governors appointed by the president and approved by the Senate in much the same way as the Federal Reserve Board. Further, there should be a Senate oversight committee, which would reflect each party equally, regardless of which party controls the congress.
Arguments for private choice could be satisfied by allowing two options: An insurance model based upon the current system of T-Bills only, and the new hybrid pension plan model. But in any case, the investing should be done by the Trust itself. As millions of Americans learned in the last ten years, only the professionals make money on the stock market. Further, there is little long-term benefit conditioning people to hope for stock market gains, rather than putting in a good day's work.
SSA 2004 Financial Condition
CBO Update on the Long Term Projections of SS
A New Campaign of Lies
There is No Crisis-Blog
Other Social Security Facts, by Jim