Current Social Security

Investing the Surplus

Much has been made of what has been done with the surplus. Simply, it's invested in Treasury Bonds at competitive rates. Considered dispassionately, the money entrusted to the government has been invested in what is universally considered the safest investment available in this country. Economists refer to interest rates on government debt as the "risk-free rate of return." Not only is this mandated form of investment risk-free, it is also so mechanistic as to be immune to political pressure on its use and, unlike investments in the private sector, has negligible costs associated with managing the investment.

Much has been made of the fact that, because the trust funds, run by the government, are invested in government debt used to fund current operating deficits, the government has "squandered" or somehow misappropriated the money. But the more appropriate way to look at the choice of investment vehicles is to imagine that the funds had been distributed to a number of private banks, with the condition that they select the safest form of investment for the funds. With those instructions, the banks would invest in the same government debt and the largest difference is that they would take a part of any earnings as management and handling fees. The money would end up in the same place, but the "middle men" would get a part of the revenues, leaving less for the trust funds, themselves.

There is one change that might have made the situation more palatable. The operations of the Social Security Trust Funds (and other, lesser trust finds) are combined with the revenues and expenses of the general fund and only the combined result receives significant attention. Because of this, President Clinton could claim to have run a surplus, when the operating budget actually ran a deficit and President Bush could claim to have a deficit of "only" $413 billion, when he actually ran a deficit in the current operating budget of over $560 billion. (In both cases, the surpluses paid into the Social Security trust funds hid the real costs.)