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Ralf Seiffe has some questions for Sen. Dick Durbin (D-IL) about social security reform.

Friday, January 21, 2005

By Ralf Seiffe

OPINION -

Note To The Honorable Mr. Durbin:

I saw you on one of the Sunday news shows as the Democrat’s point man for the “Sochsecurity” debate. I can’t tell you how relieved I was to hear you tell us there will not be a problem with Social Security until most of us will be dead. Whew! Even better, Social Security won’t be much of a problem then, either. The system will be able to meet 75% of its promises. Imagine that: all of 75%!

With that kind of certainty, we ought to be able to put off debate for another generation. Your superior understanding will certainly spare us the acrimony and anguish weaning Congress off the New Deal’s greatest accomplishment would entail. Imagine the resentment and hostility between the generations we will also avoid.

Doubly assuring is your promise that Democrats won’t raise taxes or lower benefits because you will make sure that none of our taxes will be diverted into risky private accounts.

The protection your words imply is sweet relief but, just on the off chance that your assurances come from myopic zeal, I thought I would look into the situation myself. I fired up Google and began a study of the system.

I found out that Social Security is a big deal and that it shuffles lots of money. In 2003, the trustees reported collections of more than $633 billion and made payments of $479 billion to beneficiaries and administrators. The difference--$154 Billion--is the annual Social Security “surplus”.

Despite your assurances that taxes won’t be raised, the 20 previous Social Security tax increases have helped create this annual over-funding. These surpluses have added up; since the system was “fixed” last time, the trustees have accumulated more than $1,500 billion. Yes, that is $1.5 trillion for the numerically challenged.

This huge accumulation must be the “trust fund” politicians often mention. In fact, I learned that these funds are invested in government bonds and they earn a stunning 6%, an exceptional accomplishment in today’s interest rate environment.

Undoubtedly, the promise of one government department to pay another nearly twice the market rate demonstrates concretely that Mr. Durbin and his buddies have secured a good deal for us.

I now understand why, Senator Durbin, you’re so sanguine about Social Security. I learned that in a little more than a decade, the nation’s demographics will catch up with these Social Security surpluses. When it does, annual collections will not cover the annual cost of benefits. When that happens, the trustees will simply dip into trust funds to make up the shortfall. Sounds good, Dick!

So, now that we know that the Social Security system is in such good shape, shouldn’t we use this time to engineer a better system? With the pressure off, why not take time to calmly come up with a more generous system? Isn’t this a great opportunity to recapture the public in the same way that Democrats did in 1937 when Social Security was born? For selfish reasons, Mr. Durbin, wouldn’t your fellow Democrats be well-served by redesigning a new Social Security System to be bigger and better than FDR ever imagined?

Here’s how it can be done, Senator. Reschedule the bonds with at least a 40 year term and maintain at least a 7% coupon.

First semester finance students will understand that markets bid up the price of high-coupon bonds so, if sold now, these very long term bonds should fetch large and attractive premiums over their face value. Accordingly, wouldn’t the private sector be interested in buying them?

By selling these high coupon bonds now, smart trustees could turn as much as a 50% profit for the trust fund. With a $700 billion opportunity like this, one would expect the Democrats to propose auctioning the trust fund to create big new programs to secure the votes well into the future. They could leverage the program from a guarantee against poverty to a guarantee of affluence!

Seems like a no-brainer but what I also learned is that these government securities are very special. Not only do they earn a better than market rate, they are non-marketable. Unlike any other government bond which freely trades on Chicago’s exchanges, only the Social Security Trust Fund may own these very valuable bonds.

Why not change this Mr. Durbin? If the trustees could sell these bonds now, wouldn’t additional funds extend Social Security solvency out another generation? Or, why not use those additional funds to pay 100% of the benefits you have promised?

There is no evident reason to restrict ownership of these bonds unless there is something we don’t know about them. That sad fact is that the government has made no plans to repay the trustees with real money they can use to fund benefits.

Despite your rosy prediction, Senator Durbin, you know that the Congress cannot liquidate the securities they force Social Security’s trustees to buy. When an entity cannot or will not meet their obligations, their securities become worthless. Your view of Social Security’s long-term solvency, laid out on Sunday, has the same value.

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Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader.