Thursday, June 30, 2005
Return on the trust fund
In a recent op-ed piece by William Raspberry, buying into the Trust Fund rhetoric, opines that
His recommendation?
I snarkily refer Mr. Raspberry to page 134 of the latest Trustee Report, which lays out the assets that the OASI trust fund is holding (sorry, I don't happen to have the assets of the DI handy). On 12/31/2004, roughly 33% of those assets were U.S. Bonds (yes, honest to gosh U.S. Bonds) earning a return of 6% or more. The overwhelming majority of the rest were in bonds earning 3.5-5.875% returns and a small amount are in certificates of indebtedness, which I believe are different only in that they are easier to redeem if needed.
A careful reader of this page might note with some concern that at 12/31/2003, almost 45% of the bonds were earning 6% or more. Why the large drop? There are two reasons:
In this blog, I do advocate using some amount of the Trust Fund assets to invest in riskier, higher yielding instruments (e.g. stock funds) but let's be clear, the advantage is increasing an average yield of close to 6% into an average yield of maybe 8%. Not turning a yield of 2% into a yield of 15%.
Thanks for reading,
"But in fact, that money is used for general government expenditures. And the IOUs the trust fund receives are not marketable bonds."
His recommendation?
"Why, indeed, shouldn't the trust fund be allowed to earn a reasonable interest on the money it lends the government?"
I snarkily refer Mr. Raspberry to page 134 of the latest Trustee Report, which lays out the assets that the OASI trust fund is holding (sorry, I don't happen to have the assets of the DI handy). On 12/31/2004, roughly 33% of those assets were U.S. Bonds (yes, honest to gosh U.S. Bonds) earning a return of 6% or more. The overwhelming majority of the rest were in bonds earning 3.5-5.875% returns and a small amount are in certificates of indebtedness, which I believe are different only in that they are easier to redeem if needed.
A careful reader of this page might note with some concern that at 12/31/2003, almost 45% of the bonds were earning 6% or more. Why the large drop? There are two reasons:
- First, the trust fund grew by over 10% last year, but that extra money had to be used to buy bonds in the current low interest rate environment. Yes, the same forces (e.g. China) that are keeping your mortgage payments low are keeping the returns to the Trust Funds low.
- Second, the time at which we will have to start redeeming those bonds is approaching. As it approaches, we will get lower returns, a natural trade-off for increasing liquidity (the ability to get cash back when the Trust Fund needs it).
In this blog, I do advocate using some amount of the Trust Fund assets to invest in riskier, higher yielding instruments (e.g. stock funds) but let's be clear, the advantage is increasing an average yield of close to 6% into an average yield of maybe 8%. Not turning a yield of 2% into a yield of 15%.
Thanks for reading,
Tuesday, June 28, 2005
OK, so the Trust Funds are real.
I hear tell of a rumor that some Republicans have a plan for distributing the assets in the Trust Funds into Private Retirement Accounts.
I haven't yet seen an actual quote from an actual Republican on the subject, although there are some barbed quotes from Democrats in the link above. Aside from the fact that it would be nice to hear Republicans admit that there are assets in the Trust Funds, I still feel a need to say the following: Right now, the trust funds are projected to start paying out more than they take relatively soon (2017, if memory serves) and to go bankrupt in the future (I want to say after 2040). If you simply disbursed all of the assets that the Trust Funds are currently holding, that would move bankruptcy up to 2017. I have no knowledge of the details associated with these hypothetical PRAs, but under any circumstances, we would have hike taxes to pay for those who are currently retired in 2018. No such thing as a free lunch.
In theory, I have no problem with PRAs, but my stakes in the ground are:
* No crazy borrowing
* Minimal risk to retirees
* Transparant management
My mythical readers will probably be able to point out important stakes I have overcooked.
Thanks for reading,
I haven't yet seen an actual quote from an actual Republican on the subject, although there are some barbed quotes from Democrats in the link above. Aside from the fact that it would be nice to hear Republicans admit that there are assets in the Trust Funds, I still feel a need to say the following: Right now, the trust funds are projected to start paying out more than they take relatively soon (2017, if memory serves) and to go bankrupt in the future (I want to say after 2040). If you simply disbursed all of the assets that the Trust Funds are currently holding, that would move bankruptcy up to 2017. I have no knowledge of the details associated with these hypothetical PRAs, but under any circumstances, we would have hike taxes to pay for those who are currently retired in 2018. No such thing as a free lunch.
In theory, I have no problem with PRAs, but my stakes in the ground are:
* No crazy borrowing
* Minimal risk to retirees
* Transparant management
My mythical readers will probably be able to point out important stakes I have overcooked.
Thanks for reading,
Thursday, June 16, 2005
When to retire
I apologize for my rather long absence from posting. While I would love to claim that I had a very good reason for my break, I was just busy.
I had been hoping to write posting about the impact of the retirement age on the Social Security shortfall, but the American Academy of Actuaries already did, so I will excerpt it below.
Two excerpts I found particularly interesting:
"Ron Gebhardtsbauer, the senior pension fellow of the American Academy of Actuaries, today told Congress that an additional raising of the normal retirement age would reduce the Social Security solvency shortfall by approximately 36 percent... Social Security's normal retirement age recently increased from 65 to 66. Gradually raising it further by 1 month every 2 years would reduce Social Security's shortfall by about one-third."
and
"increas[ing] the earliest eligibility age from 62 to 65... reduces Social Security's shortfall by an additional 10 percent"
As are many other proposals for fixing Social Security, these are benefit decreases, but I tend to side with the Actuaries, and with others who have proposed this fix. Mortality rates have dropped significantly since SS was first put into place. Since benefits were not adjusted as that happened, we have had a series of de facto benefit increases every year. The proposal would be to more or less match the eligible retirement age so that it matches changes in mortality, keeping the system in synch.
A problem with this proposal is that it does not recognize that people age differently. Some 66 year-olds may be more in a position to continue working than others. To rectify this, I would propose some medical-based conditions (looser than those required for SS disability payments) that would allow certain workers to retire earlier. While this would lessen the effect of this proposal on closing the gap, I have to believe that the gap would still shrink by more than a third (compared to 45% above).
Coupled with other proposals, such as allowing the SSA to invest the trust fund in riskier assets could, this proposal could well close half the gap, pushing the key dates in the Trust Funds' lives decades away.
Thanks for reading.
I had been hoping to write posting about the impact of the retirement age on the Social Security shortfall, but the American Academy of Actuaries already did, so I will excerpt it below.
Two excerpts I found particularly interesting:
"Ron Gebhardtsbauer, the senior pension fellow of the American Academy of Actuaries, today told Congress that an additional raising of the normal retirement age would reduce the Social Security solvency shortfall by approximately 36 percent... Social Security's normal retirement age recently increased from 65 to 66. Gradually raising it further by 1 month every 2 years would reduce Social Security's shortfall by about one-third."
and
"increas[ing] the earliest eligibility age from 62 to 65... reduces Social Security's shortfall by an additional 10 percent"
As are many other proposals for fixing Social Security, these are benefit decreases, but I tend to side with the Actuaries, and with others who have proposed this fix. Mortality rates have dropped significantly since SS was first put into place. Since benefits were not adjusted as that happened, we have had a series of de facto benefit increases every year. The proposal would be to more or less match the eligible retirement age so that it matches changes in mortality, keeping the system in synch.
A problem with this proposal is that it does not recognize that people age differently. Some 66 year-olds may be more in a position to continue working than others. To rectify this, I would propose some medical-based conditions (looser than those required for SS disability payments) that would allow certain workers to retire earlier. While this would lessen the effect of this proposal on closing the gap, I have to believe that the gap would still shrink by more than a third (compared to 45% above).
Coupled with other proposals, such as allowing the SSA to invest the trust fund in riskier assets could, this proposal could well close half the gap, pushing the key dates in the Trust Funds' lives decades away.
Thanks for reading.
