Money-Rx Blog

Allen Sloan, Senior Editor at large of Fortune magazine, has a habit of explaining complicated things in a simple manner which gets even a dimwit like me nodding along in agreement. This becomes very, very inconvinient for other economists and financial analysts who labor hard to make simple things sound extremely complicated with pie charts and mind-numbing statistics. And, of course, the biggest victims of Sloan's ability to drill down to the basics are the companies, people and organizations who are trying to hide behind charts and figures.

His latest victim is the Social Security Trust Fund. Writing for his Deal column in Fortune, Sloan says that we need to start worrying about Social Security insolvency starting in 2016 or 2017, and not 2040, a date which has been bandied about a lot. And then he explains it. And then some.

The real problem starts only a decade or so from now, when Social Security begins to take in less cash than it spends. How can I say that, given Social Security's $2.3 trillion (and growing) trust fund? It's because the fund owns nothing but Treasury securities. But Social Security's Treasuries won't help cover the program's cash shortfall, because Social Security is part of the federal government. Say that Social Security calls the Treasury sometime in 2017 and says it needs to cash in $20 billion of securities to cover benefit checks. The only way for the Treasury to get that money is for the rest of the government to spend $20 billion less than it otherwise would (fat chance!), collect more in taxes (ditto), or borrow $20 billion more (which is what would happen).

Read the full article - March 19, 2008 - Social Security's running out of time, Allen Sloan, The Deal, Fortune.

If it wasn't so serious a problem, it would be laughable. If the Social Security Trust Fund were invested in non-government assets, they could simply cash out whenever they wanted to, which would give us another 25 years to solve the problem. But as it stands today, the 2.3 trillion the trust collected, it paid to the federal government, and got treasuries in return. The federal government has had a fun time spending all that money, and now they're broke and in debt. So
the 'People', who already paid money once into Social Security, will have to pay it in again, one way or another, in order to keep the mirage of that $2.3 trillion alive.

Or, we could write it all off, tell the boomers to go boom themselves and send the social security trustees and fund managers back to business school to study the ABC's of investing. Seriously, the damage is still ongoing. Even as we speak, billions of dollars are flowing into treasuries, which is then promptly spent and adds to the federal debt, and Social Security's problems.

If we want to solve this mess anytime soon, the best way to start would be to stop investing social security funds in treasuries and start investing like everyone else. If the investments work out properly, it could start cutting into the shortfall, and in a couple of decades, God and markets willing, the problem could solve itself without having to make any painful cutbacks in benefits or increase in taxes.