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,
