40
◼ SOLUTIONS Bloomberg Businessweek August 31, 2020means-tested transfer programthatdrawsonallofthe
nation’s financial wherewithal,notjustonpayrolltaxes?
The justification in the1980sforbulkingupthetrust
fund for old age and survivorswasthatthehugeBaby
Boom generation would prefund itsownretirement.
It would pay into the fundwhileworkingandthendraw
the money down in retirement.Theflawin thelogicwas
the false assumption thattherestofgovernmentwould
run a more or less balancedbudget.Thatdidn’thappen.
Instead, the “off-budget” surplusin SocialSecurityoffset—
or essentially hid—a growing“on-budget”deficitin therest
of government. “Competitionbetweentwopoliticalpar-
ties exploits the ignoranceofvoters”whodon’tunder-
stand federal budgeting,KentSmettersoftheUniversity
of Pennsylvania’s WhartonSchoolwrotein a 2004paper,
“Is the Social Security TrustFunda StoreOfValue?”
“Ignorance”isa bitstrong,butit’sfairtosaySocial
Security’srolein thefederalbudgetbalanceisconfusing.
The trust fund isn’t investedin goldbarsorranchland.Its
only holding is special securitiesissuedbytheTreasury.
In other words, Social Securityhaslent$2.9trilliontothe
Treasury, which spent itall.NowSocialSecuritywants
its money back to coverbenefits.Sostartingthisyear,
it’s redeeming some of thosespecialTreasurysecurities.
To raise the money to paySocialSecurity,theTreasury
draws on general revenue.Tenyearsago,SocialSecurity
Chief Actuary Stephen Gosscorrectlystatedin theSocial
Security Bulletin that redemptionofthetrustfundwould
require the Treasury to “collectadditionaltaxes,lowerother
federal spending, or borrowadditionally from the public.”What happens when the trust fund runs out will depend
on Congress. If it does nothing, old age and survivor ben-
efitswilldropovernightby24%.That’sunlikely.It’smore
likelythatsometimebetweennowandthena blue-ribbon
commission will recommend, and Congress will pass, some
package of tax hikes and benefit cuts.
But Congress has another option. It could allow Social
Security to issue bonds—in other words, to borrow from the
Treasury. Over a period of decades, the borrowing would
likely grow into the trillions of dollars. But this would be one
arm of the federal government owing money to another, the
equivalent of your left pocket owing money to your right. In
other words, sustainable.
If Social Security borrowed from the Treasury, the
Treasury would have to raise the money to lend to Social
Security by raising taxes, cutting other spending, or bor-
rowing. But of course, that’s what the Treasury is already
doing as Social Security redeems some of the special
Treasury securities in its trust fund. From the Treasury’s
viewpoint, there is zero difference between giving cash to
Social Security for new bonds it issues and giving cash
to Social Security for old Treasury bonds that it redeems.
It’s not Plan A, but a solution along those lines is likely
to become part of the conversation over the next decade
as the Social Security trust fund plummets toward zero.
�Peter CoyTHE BOTTOM LINE The Social Security trust fund will run out in a dozen
years or so if nothing is done. Some experts say the government should tap
general revenue to pay beneficiaries.Looking Beyond
The 60/40 Rule
The pandemic is making
some investors rethink a
classic approachIt’s an investing strategy that many trace back almost a
century, when a young accountant named Walter Morgan
started to become alarmed at the rampant speculation in
the booming 1920s stock market.
His solution was what became known as the
Wellington Fund, the first “balanced” mutual fund that
invested in both stocks and bonds. In the early 1950s,
economist Harry Markowitz laid out the math that
showed mixing stocks and bonds delivered ideal diver-
sified portfolios for those worried as much about risk
as much as return. Eventually the blend of 60% stocks
and 40% bonds became close to gospel in the industry,with a wide variety of regular savers and professional
investors anchoring retirement plans somewhere around
“60/40,” or at least using it as a benchmark against
which to compare other strategies.
And it’s had a heck of a run, even in a year as crazy as- A basic 60/40 strategy is up about 8% this year,
and was down much less than the stock market at the
depths of the pandemic-induced sell-off in March. That’s
after earning an annual compounded rate of return of
almost 10% since the 1980s.
Yet many on Wall Street are trying to send this
time-tested retirement scheme into retirement itself.