Investing surplus in stocks? Why? What does it accomplish?

[Bill Larsen <dadbill@surfnet1.net>]

Should we invest the OASI surplus tax revenues and current funds in other than US Treasury Notes?  This is a good question.  Depending on the answer to the question "why should we invest in non treasury investments", I could give different answers.

If the answer is to increase revenues for OASI, the answer is no.  The simple reason is I do not want to compete with another entity with basically my own money.  If Social Security is going to invest in stocks, then who is going to loan the government the money?  If Social Security thinks US Treasuries stink, then what kind of message will this send to other purchasers of these notes?  

I have followed the bid ratio for over a decade and have noticed the number of bids for US Treasury's have dropped.  What happens when it falls below one?  It means there are insufficient bidders to cover the current offering.  If the general revenue side has a shortfall, then they have to borrow at a much higher interest rate.  I truly believe the reason for the general revenue side shortfall and the national debt is due solely to FICA tax increases which squeezed out federal revenues over the past 25 years.  It competed for and got those revenues at the expense of Federal income taxes as well as corporate taxes.

Another reason for saying no is, why should I want Social Security to tax me, the worker, more than is required and then use the excess to make more money?  Why not keep the money for myself?  Rather dumb to be paying 7 to 8% mortgage and then let the government borrow your money at a 1%return or less so they can make 8-10% in the hopes of continuing to pay current beneficiaries a good return.  As the rate of return goes up relative to the replacement rate, the amount required each year to save or tax in this case drops.  Check out what the OASI tax rate needs to be and compare it to what it is.  It they increase the rate of return, will the cut the OASI tax rate?

Http://www.surfnet1.net/dadbill/OASI_TAX_RATE_TABLE.HTML

Another reason for saying no is, what is the rate of return required to make up the shortfall in OASI?  The calculated rate of return till 2078 is 15.83% each year.  Is this possible?  No!  Therefore, even attempting has no meaningful objective except to continue to rob today's workers of their wages.

But the most important factor is why do we need to do this?  Our we trying to sugar coat the real problem?  If all we want to do is feel good, then it may make people feel good knowing OASI will last a few more years.  But it will do nothing long term for Social Security and may actually hurt the economy.  When people find they have been scammed once again, their mood will be even uglier than it is now.

There are two methods of investing.  Private accounts controlled by the worker and a fund managed on behalf OASI.  I favor Private accounts over a managed fund, but this does nothing to cure the problem or pay the transition costs of $10 Trillion in 1999 dollars.  Leaving the money in a manage fund does nothing for me since the rate of return will be insufficient to fix the problem and pay the $10 Trillion transition cost in 1999 dollars.  The fund will be exhausted before my children retire.

The fix for OASI is not private accounts nor investing in stocks.  The fix is a benefit cut.  Investing in the market will raise the cost of capital for the general expenses which will cause income taxes to go up while at the same time the ROR for Social Security will be insufficient to be solvent even for my kids.  Kill the beast in the name of children!