Would You Take 77 Cents For Every Dollar Social Security Owes You?

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In 2012, I asked, "Would you settle your claims on Social Security for 83 cents on the dollar?" and answered, "In a heartbeat!" (See "How to Fix Social Security," Barron's, March 10, 2012). I figured 83 cents was the fair price, because the assets of Social Security were reported as 83% of its liabilities. If you could have done that deal, you would have been smart, because now the former fair price is gone.

The June, 2015 report of the Congressional Budget Office updates Social Security's financial deficit. According to Social Security expert, Andrew Biggs, the updated calculations show that Social Security could pay its obligations if all benefits were immediately cut across the board by 23%. [link to Andrew Biggs, "CBO: Social Security shortfall quadrupled since 2008"] That is the same as saying that Social Security's assets are only 77% of its liabilities. In other words, the fair price to settle your claims on this government program, publically admitted to be insolvent, is now down to 77 cents on the dollar.

Would you still do it at that price? I certainly would! I would without a moment's hesitation take 77 cents that I would actually own, rather than the very dubious promise of a dollar sometime in the future from a government financial program run on political principles.

As in 2012, large numbers of the creditors of Social Security, especially young people, do not believe they will ever collect on Social Security's debt at par-and they are right. Nothing is more classic in finance than to settle the debts of an insolvent debtor at a discount-so why not with Social Security? I think this possibility should be offered to the American public on a purely voluntary basis.

It is perfectly possible to set up a method to do this. Its mechanics are described at the end of this article. Every time some prudent people took a sure 77 cents instead of a dubious future dollar, not only would they be better off on a risk-adjusted basis, but the deficit of Social Security would shrink. This is because its liabilities would do down by a dollar, while its assets only went down by 77 cents. The government's finances would thereby improve with every such transaction.

Social Security, like many other public pension plans, is a good example of Wimpy Finance. The leading proponent of this financial school is the character Wimpy in old Popeye cartoons, whose motto was: "I'll gladly pay you Tuesday for a hamburger today." At last Tuesday must inevitably come. Before it does, it would be a good idea to settle the Wimpy IOUs of Social Security for 77 cents on the dollar, if it were possible to do so.

Three years ago, I suggested that "Congress should rush to enact this program." In fact it should have, but of course it hasn't. I am shocked, shocked that politicians would refuse to give Americans a choice over their own financial future, refuse a chance to reduce the net liabilities of the government, insist on keeping creditors of a patently insolvent scheme captive, and cling hopelessly to Wimpy Finance. Meanwhile, Tuesday draws ever nearer.

How It Would Work Mechanically

For those who choose to settle at a discount, the execution would work like this. From the time of the decision on, every payday the 6.2% deduction from your paycheck, instead of disappearing into the maw of the insolvent Social Security program, would directly buy from the Treasury an equivalent amount of actual Treasury bonds, preferably inflation-indexed ones, which would be automatically deposited in your IRA. You now would have assets you truly own, which you could hold or sell to reinvest in your IRA at your option. In exchange, you would give up future scheduled Social Security benefits in the amount of the bond purchase divided by 0.77. This is the same saying that you would be paid in bonds 77% of the reduction in your scheduled future benefits. But you know that as things stand, all the benefits cannot be paid anyway. You gain certainty, and divest yourself of considerable political and financial risk. Social Security shrinks its deficit and the government shrinks its total obligations.

It's a win-win.

 

Alex J. Pollock is a distinguished senior fellow at the R Street Institute in Washington, D.C. He was President and CEO of the Federal Home Loan Bank of Chicago from 1991-2004.  

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