Capitol Hill Blue Forums Political Issues Finance, the economy & Economics A fix for the SSTF

I got to thinking this morning about Social Security and the Trust Fund where the excess premiums are invested.

People say we are going to run out of money to pay benefits in such and such a year. Perhaps we can fix that.

The Trust Fund buys special Government bonds at fixed interest rates to increase the amount of money available to pay benefits in the future. The earned interest rate is based on a complicated formula set up almost 60 years ago. And that formula is now biting the SSTF in the butt because of low interest rates established by the Federal Reserve System.

Let us do away with that formula and replace it with the following:

Rather than refinancing the bonds at a current interest rate (which has resulted in historically low income for the SSTF) tie the interest rate to the previous year's increase in the GDP, with safeguards to keep that interest rate in the positive zone.

If the GDP increase is 4% for FY 2016, then for the next year that 4% is the new interest rate for ALL of the bonds held by the SSTF. If, though, the increase in the GDP falls below the Fed Fund rate, pay interest equal to that Fed Fund rate for the next year.

The SSTF benefits directly from a strong economy, which means that eventual retirees will benefit.

While the idea sounds appealing I see at least one issue (possibly more): interest rates are supposedly a function of market forces. The spread between funding and lending is how banks make money. Banks and other institutions are the main consumers of Treasury bonds. Since 2009 the swap/FRA market is tied to the Fed funds rate (overnight). These rates are all inter-related and they have recently been well below the GDP. International markets also depend on these rates.
Will the banks go for this (the SSTF getting what may be a preferential rate)? And how would it be implemented.?

First off, it is because of the artificial interference with the market that has driven interest rates to these historic and long-term lows. The relationship between the SSTF and their borrowers does not affect the market one way or the other except insofar as the Government would rather borrow at lower rates than they pay the SSTF. But a statutory requirement that they pay these interest rates would solve that problem. And remember also that the Government does not actually have a choice about borrowing from the SSTF. So that money is going to be borrowed by the Treasury regardless of and without affecting the general market.

I highly doubt that the speculators will agree with that. Rates are used as reference. You would be creating yet another one. The affect is not just physical, it is expectation.
The market forces are part of the system. I think that changing the system is the only way around that. A good idea but requires more than just desire to do so.
The interference is what central banks do. Monetary policy, while for the most part useless, is based on that tenet. So, change the system and that interference goes away.
Thus, again, the only way I see of implementing the idea is by a radical change to the framework of the system. I like the idea but Clinton would never go for it. Especially with her backers.

The easiest fix for the SSTF is to raise the wage cap.

Which would be less charged politically?

Changing the t-bill rate to be some artificial value ultimately just raises the national debt more. I doubt you could get this passed in Congress. Republicans would complain about debt and Democrats would not like the fact that all income taxpayers would pay for it.

Raising the wage cap would be a bit easier to pass because it takes the money from an identifiable group, people with high incomes. Who can easily afford it.

I didn't say anything about changing the t-bill rate; that's sort of market driven, with a big push from the Fed.

What I did say was we should completely separate the interest rate paid to the SSTF from the Fed rate and instead tie it to the changes in the GDP.

I understood that already. My comment still applies.

The wage cap for 2017 is $127,200. I cannot conveniently lay my hands on any reliable data for how many are above the existing wage cap for 2017. BUT I did find data for 2011. Almost 9 million workers were then earning more than the then-current wage cap. That's 8.5 percent of the population. Raising the pay cap back then would have taken a bite out of income for almost 9 percent of the working public. Sell that to Congress. Hell, sell it to the public.

The problem is we are NOT talking about a tax on the top one percent here, it's a hell of a lot more than that. What these people are is, basically, the upper part of the middle class. Go ahead, gouge them a little bit more.

My suggestion would put more into the SSTF when the GDP was doing well and cut back when it was doing less well. You could call it a prosperity tax without being too far wrong. In the final analysis it is a relatively painless way to keep the SSTF solvent while maintaining a cap pretty much where it is.

I really have no serious objection to raising the cap, except that it is politically difficult to do. How many Congress critters would even understand an interest rate based on GDP anyway?