A Radical Plan for Social Security
Ronald R. Cooke
 

The Very Big Insurance Company
 
Suppose the Very Big Insurance Company sold millions of retirement policies to the workers of America. For a modest monthly premium, Very Big promised every policy holder a financially secure retirement. The Very Big Insurance Company gave each worker an individual contract and an annual statement of retirement benefits.
 
Unfortunately, Very Big's executives underestimated the cost of these benefits, and spent most of the money that had been entrusted to them. This went on for many years. Eventually, however, an auditor figured out that although Very Big had enough cash flow to cover current retirement policy benefits, it did not have enough income to cover future liabilities. The Very Big Insurance Company was headed for certain bankruptcy.
 
But Very Big's executives had a ready answer. "All we need to do is increase the cost of worker premiums and reduce the benefits we promised to pay to future retirees. That way, we can remain solvent". The auditor, however, was still nervous. "What happened to all of the money Very Big received for premiums?" Very Big's executives dismissed the auditor's concern. "We spent it, and its gone."
 
Now I have a few questions.
 
Were the executives of The Very Big Insurance Company completely honest?  Did they defraud the workers of America? Did they misrepresent their intentions? Did they squander the premiums? Did they breach their contractual obligation? Did they violate their fiduciary responsibility to the retirement policy holders?
 
And more questions.
 
If Very Big's Enron style of accounting were discovered by our politicians in Washington, would there be a big stink? An investigation by multiple Congressional Committees? Much pontificating by breast beating politicians? Would the Justice Department take action? Would the press have a field day with allegations, conjecture, and soap opera style reporting?
 
This is a very sad day for America. But the answer to all of these questions is: YES.
 
How can Very Big's executives get away with it?
 
Because they are politicians. We have been conditioned to expect them to pull stunts like this.
 
And now Very Big's executives, - hands still firmly clenched on the goodies in the tax cookie jar - tell us they are going to fix the Social Security mess.
 
Why should we believe them?
 
The Congressional Credibility Problem
 
In my previous article on Social Security "Will Social Security Bankrupt America?", I pointed out that Social Security accounting is done with smoke and mirrors, there is no such thing as a "Trust Fund", and – for the reasons discussed in the article – the Federal Government may not have the resources to finance future Social Security benefits. Congressional comments, on the other hand, frequently convey the belief that Social Security can be fixed with some minor tweaking. Democrats like Kennedy and Boxer even claim there is no "crisis".
 
That's absurd. These people obviously slept through their accounting and economics courses.
 
Congressional members who sink into the sludge of extremist squabbling make themselves part of the problem, rather than a contributor to the solution. We are witness to a never-ending power struggle between the NeoCons and the Liberals. Such theatrics make great press. But it is difficult to see how Congress can assure the financial viability of Social Security if legislative reasoning is based on political bias, rather than a realistic assessment of future revenues, liabilities and cash flow.
 
And oh yes, a spirit of teamwork. You know. Do something for the American worker.
 
As things stand, Congressional ideology reflects either a pervasive ignorance or a deliberate disdain for any sense of fiduciary responsibility. If Social Security is merely a source of tax revenue, then Congress can ignore the possibility that American workers have a legitimate claim against the assets of the Federal Government. Accounting can be deceptive. The terms "assets", "liabilities", and "cash flow" need not appear in the debate.
 
Thus we see multiple members of Congress talking about the Social security "surplus". What they don't realize, or perhaps chose to ignore, is that the current surplus is merely an excess of collections over distributions. In other words, Social Security is running a positive cash flow. That's nice. Unfortunately, however, Congress has every intention of spending that money to fund the federal Budget. Congress also deliberately ignores, or perhaps doesn't understand, that every dollar of this "surplus" should be – under lawful accounting procedures – offset with a dollar of liabilities. In other words, Congress is willing to recognize cash on hand, which is an asset, but is unwilling to acknowledge that future benefits represent a balance sheet liability.
 
And these people are making fiscal policy??
 
The Cooke Social Security Proposal
 
Since rational thinking appears to have been overwhelmed by nasty political power struggles in Washington, it is up to us poor economists to suggest a solution for Social Security. I thus have a plan. It's a very simple plan. Even Teddy Kennedy should be able to understand how it works.
 
Every good plan starts out with a clear statement of purpose and a set of specific objectives.
 
Purpose: The fundamental purpose of Social Security is to provide American workers with a dependable source of monthly income when they retire.
 
Objective One: Social Security must be administered by a system of management that has a defined fiduciary responsibility to present and future beneficiaries.
 
Objective Two: Social Security funds must not be co-mingled with Federal Tax revenues.
 
Objective Three: Congress must divorce itself from any involvement in the management of the Social Security system.
 
Objective Four: In order to insure its ability to meet current and future beneficiary obligations,
 
Social Security must have a viable financial structure.
 
Social Security represents a contractual obligation between the Federal Government and the workers of America. It is part of the Social Contract that exists between any government and those who are governed. As such, Congress has an obligation to put a plan in place that is trustworthy as to purpose, and credible as to substance.
 
There must be an explicit benefits plan. Each participant must have an individual account that is tied to a record of earnings. Beneficiary accounts must be guaranteed by a legitimate and unimpeachable "Trust Fund".
 
The entire Social Security program must be privatized and administered for the benefit of its participants. The Social Security Administration should be structured as a quasi-public institution with appropriate rules for the recognition of income, expenses, assets, liabilities, and cash flow. There must be an independent Board of Directors who are charged with overseeing policy and operations.
 
There must be a set of financially responsible investment criteria. In order to secure the financial viability of the Trust Fund, Social Security's administrators must be able to cash existing Federal Government IOUs on a reasonable schedule of repayment.
 
Assuming the Federal Government wants to continue its practice of borrowing money from the fund, and to insure such borrowing is financially responsible, a new investment vehicle will be created. Called Federal Revenue Bonds, these instruments would be limited to the funding of capital formation projects that – over the life of the bond – would be repaid, with an appropriate rate of interest, by the revenues generated by the physical asset thus created. The Social Security Administration would have the right to accept, or reject, each proposed project. Examples of such projects include bridges, toll roads, port facilities, airports, office buildings, hospitals, schools, and rail yards.
 
In addition, the Fund would be able to make short term loans using existing available instruments such as bank, corporate, and treasury notes. The fund would also be enabled to purchase credit worthy revenue bonds issued by individual State governments.
 
Although the interest payments and capital gains from these financing vehicles would not be spectacular, they would be as secure as our economy and they would provide a steady flow of income into the fund.
 
The Result
 
As an independent quasi-public entity, with an independent Board of Directors, Social Security can become the retirement fund that we were promised when Social security was established in 1935.
 
Is this too much to ask?
 
©2005 Ronald R. Cooke