Before we get our fruit baskets out, an aside to those who insist the trust fund is just plummy: if that’s the case, why not solve Social Security’s problems by printing up a $12 trillion Treasury bond and putting it into the fund? Do you see why that won’t work? Then why would a $1.2 trillion fund work?
Now to the baskets. The fund owns Treasury securities because it’s required by law to own only securities guaranteed by the federal government. But that problem can be solved. Herewith, a modest proposal: instead of buying Treasuries from the government, Social Security could buy mortgage securities guaranteed by Ginnie Mae–the Government National Mortgage Association–which is part of the Department of Housing and Urban Development. Ginnie securities are fully backed by the federal government.
Owning Ginnies is the functional equivalent of owning mortgages, except that someone else worries about collecting the payments from homeowners. If Social Security started buying Ginnies rather than Treasuries, it would eliminate the problem of the federal government’s issuing I.O.U.s to itself and then having to cover them. Homeowners rather than taxpayers would be on the hook for the money. Mortgage payments from America’s homeowners would put cash into the Social Security system, rather than taxpayers’ having to pony up. You promote home ownership and at the same time help pay future benefits to retirees, survivors and the disabled.
This alone wouldn’t solve Social Security’s long-term financial problems. But having Ginnies in the trust fund would let us cover a Social Security cash deficit without tapping taxpayer money, at least for a while. It would buy time. It would help ease the transition to whatever system we may adopt.
Obviously, buying Ginnies is more difficult than merely swapping cash for special-issue Treasuries. So you hire experts, or contract out. The Ginnie Mae market, which issues about $100 billion of securities a year, isn’t big enough to absorb all of Social Security’s surplus cash, about $93 billion this year. But you could put a sizable chunk of that cash into Ginnies without messing up the market. And you could buy lots more mortgages if we amend the law to allow the fund to buy mortgage securities issued by Fannie Mae and Freddie Mac, which carry an implied federal guarantee rather than a formal one.
Having the fund buy mortgages instead of Treasuries would mean that mortgage rates would be somewhat lower than they’d otherwise be, Treasury rates somewhat higher. This wouldn’t help the economy per se. But it would sure help make Social Security more secure, because the trust fund would help close Social Security’s cash deficit, currently projected to start in 2016. You’d be setting today’s surpluses aside for tomorrow’s beneficiaries. As things stand now, the only way to “save” those surpluses is for Uncle Sam to use them to buy Treasury securities held by investors. The logic: having fewer Treasuries in investors’ hands will make it easier for the Treasury to borrow when baby boomers are retiring en masse. That’s far better than merely spending the Social Security surplus, which the government did until it began running surpluses a few years ago. But making it easier to borrow money still means borrowing money. Also known as deficit financing.
I ran the Ginnie idea by a spokeswoman for Treasury Secretary Paul O’Neill, because O’Neill is the trust fund’s managing trustee. The spokeswoman agreed that Ginnies are a legal investment for the fund. So what about buying them? “It’s not under consideration,” she said. She wouldn’t elaborate, so I will. The Bush administration is gung-ho for private Social Security accounts. Using the surplus is the obvious way to fund them.
The Social Security trust fund is only part of the overwhelming problem of dealing with America’s aging population. But when you see low-hanging fruit, you pick it. And you worry about the rest of the farm later.
