Subject: RE: Mr Reischauer and SS "Special Obligations"
>From: Andre Dermant
>>>>In his message entitled: "Some Reaction to a few of the Comments" no. invest/msg00088, Mr Reischauer says:
>>>>"Under current law, we require that Social Security reserves be invested in special Treasury securities which have a relatively low yield".
>>>>This is not accurate. The law says that the Trustees may invest the Trust Fund surplus in normal government obligations or special obligations.
Although there is no law, there are administrative rules that steer the TF to the special obligations normally.
>>>>The interesting thing is that the Trustees kept investing in special obligations during the 80's and early 90's when interest rates kept going lower and lower from high levels. If the Trustees had invested in regular Government obligations, the Trust Fund would have been able to sell these bonds with gigantic profits. I have written to the SS actuaries and I was never able to get an answer to this crucial question.
A couple things wrong with this. First, they have steered away from such marketable securities because of this very reason. They want to keep the TF from interfering with the markets. If the Trustees had the power to 'trade' TF bonds on the market and affect interest rates, they would have a power Congress didn't want them to have. Also, they want non-active management of the trust fund (interest not capital gains). Part of this is an effort for neutrality between the SSTF and the general fund. Many of the mechanisms in place are 'dumb' mechanisms to prevent either side (SS or Treasury) from taking active advantage of the other based on particular interest rates or other matters. Sometimes one or the other side 'benefits', but it usually averages out. With active management, you would get all kinds of 'turf' battles.
The second problem is more basic. Even if they could do what you suggest, there is no gain to SS. If they sold a high interest bond that had 15 years to go, they could only invest the proceeds in other US bonds. Their yield on replacement bonds of either type (marketable or non) would be the going (lower) rate. After the 15 years, the sale would be a wash - the capital gains would have been eaten up by investing the 15 years at lower rates. That is why there is a capital gain to begin with. You had to give 'value' in exchange for 'value'. There is no free lunch.
