Download “save social security” bonds

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“SAVE SOCIAL SECURITY” BONDS:
AN INVESTMENT IN AMERICA’S FUTURE
by Michael Donihue and Jan Hogendorn
Department of Economics, Colby College
The major long-term macroeconomic problem facing the United States is
the eventual inability to finance social security benefits for the boomer
generation without either cutting benefits or raising payroll taxes. Much else
about the general macroeconomy is outstanding, with a budget surplus so large
that many politicians are proposing to pay off the national debt as early as the
year 2012.
But the goal of paying off the national debt, while attractive, has a
decided downside. U.S. Treasury notes and bonds are important components of
financial portfolios throughout the world. Financial economists and investment
bankers look to Treasury bonds as the closest thing to a risk-free asset to
balance more risky investments. Paying off the debt would mean the loss of
these assets and a reallocation of portfolios toward riskier alternatives such as
Fannie Mae bonds and private securities. Thus the retirement of federal bonds
will mean that investors here and abroad will find that the safest, most secure
asset in their portfolios will start to disappear and eventually will vanish
entirely.
These two “retirement problems” — the social security shortfall and the
disappearance of federal bonds from investors’ portfolios — can be solved
simultaneously and simply by the issue of new “Save Social Security” bonds.
“Triple-S” bonds of varying maturities would be off-budget and issued by the
federal government on behalf of the Social Security Administration. Revenues
raised would help fund the nation’s social security system, supplementing social
security taxes and ensuring that benefits need not be cut or the retirement age
raised. Like current U.S. government bonds that soon will be paid off, these
long-term instruments would pay market rates of interest and could be freely
bought and sold on the bond markets.
Triple-S bonds would offer decided advantages.
• Most Americans are interested in shoring up social security and they
will be able to do so directly by buying Triple-S bonds. The revenue would
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limit the danger that social security taxes would have to be raised, benefits cut,
the retirement age raised, or all three. The Triple S on the bonds could be
viewed as an emblem of national pride. Individuals could purchase bonds with
maturity dates equal to their own projected retirement dates.
• Bond are an appropriate way to finance the temporary social security
shortfall after the boomers retire. The need for a major infusion of funds is
limited, and will decline when this bulge has passed. Bond financing is
progressive — higher income groups will buy most of the bonds. If tax hikes or
benefit reductions are employed instead, lower income workers would suffer
because the payroll tax is notoriously regressive and benefit cuts would be
borne disproportionately by those who have saved the least. True, the interest
cost of Triple-S bonds would be funded from taxation, but this would be a less
painful way to fund the shortfall than would a payroll tax increase, a cut in
benefits, or an increase in the retirement age. Bond financing to rescue social
security is also a much less risky alternative to privatizing social security
accounts than placing a portion of payroll taxes in managed stock or mutual
fund accounts.
• Triple-S bonds will be indispensable for a diversified portfolio. Foreign
citizens and governments will want them as a hedge against domestic risk. Not
keeping U.S. bonds in the foreign asset mix would likely increase volatility in
world financial markets. Rather than having to turn to riskier private securities,
investors could buy Triple-S bonds backed by the full faith and credit of the
U.S. government and just as secure as today’s Treasury bonds. Some of the new
Triple-S Bonds could even be indexed to provide risk-free retirement
investments.
• Triple-S bonds would help ensure debt retirement and foster long-term
growth. Initially the revenue would pay down the national debt faster than is
now foreseen. Current plans for debt retirement are based on projected revenue
streams that may never occur should economic growth falter. Triple-S bonds
would prove useful in ensuring that retirement of the “normal” national debt
continues. Later, assuming the “normal” national debt is paid off, there would
be another role for Triple-S revenue. During periods when social security tax
revenues are greater than social security outlays, bond revenue could strengthen
social security by bolstering the future performance of the U.S. economy. The
funds could be used to finance productivity-enhancing improvement in
education, transport and communications, technology R&D, or alternative
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energy development. The authorities managing the funds would be charged
with choosing investments of high promise in making the private economy
more productive, and a more productive economy would ensure the solvency of
social security into the long-term future.
Are there downsides? Very few and all easily manageable.
• Might not the government make this sort of funding open-ended, using
the revenue for general spending, once again running deficits, and so increasing
the national debt as in the 1970s and 1980s? This possibility can be controlled,
first by limiting the use of the revenue to strengthening social security directly
or indirectly and prohibiting its use for other purposes; and second by limiting
the issue to amounts set by the Federal Reserve Board of Governors.
• What would happen when the need for funding the boomers’ retirement
has passed? The public will find the Triple-S bonds so attractive as an asset that
they will continue to buy them, perhaps in sufficient quantity that the regressive
payroll tax could be reduced, the scale of benefits could be increased, the
permitted retirement age could be lowered, more productivity-enhancing
investment could be made, or all of the above.
• What if we overestimate the appeal of Triple-S bonds and sales are
limited by lack of demand? No matter (aside from the disappointment), because
any sales at all would work directly to increase the funding for social security
and put safe, secure assets into the public’s hands. Even a relative failure would
help at least a little.
Here then are two major problems of “retirement” — a ticking biological
clock that will cause a shortfall in social security funding and the vanishing of
federal bonds as the national debt is paid off — both effectively solved with
little downside risk. The plan could be instituted virtually at once. If Triple-S
Bonds were adopted now, we would be among the first to buy them, investing,
just as anyone else could do, in America’s future.
Michael Donihue is Associate Professor of Economics at Colby College and was Senior
Economist responsible for macroeconomics and forecasting at the President’s Council of
Economic Advisers in 1994-95. Jan Hogendorn is the Grossman Professor of Economics at
Colby College and last year was visiting senior fellow at Linacre College Oxford.