Social Security Reform

Congress needs to look at increasing the return of the current surpluses in the Social Security Trust Fund to help solve long term fiscal problems.

April 29, 2005

Dear Congressman ,

President Bush and the Congressional leadership are correct to address the long term problems of social security. Normally we wait until we have a crisis to find a solution and find our options are very limited.

It appears that one solution to the problem may be changing the investment of the Social Security Trust Fund. President Bush has correctly identified the problem of low rates of return of the trust fund as a major problem. On the White House website ) data is cited from the Social Security Trustees and the Congressional Budget Office. The projected long term earnings of the Trust Fund are 3% to 3.3% (i.e. above inflation) with the current investment strategy in government bonds. If the Trust Fund was invested in the stock market the return would more than double to 6.5% to 6.8% (i.e. above inflation) with an increase of 3.5% rate of return.

The Social Security Trust Fund and Disability Insurance Fund currently has $ 1.850 Trillion and will grow to $ 3.955 Trillion by 2014 before eventually declining. The additional 3.5% interest if invested in the stock market would supply $ 65 Billion today growing to $ 138 Billion in 2014 per year. When you factor in the compounding nature of investing at a higher rate of return the balance of the Funds would increase from
$ 3.955 Trillion to $ 5.080 Trillion. A Trillion dollars would fill in a significant gap.

Why can’t Congress change the SS Trust Fund so it can invest in the market like other pension and public funds? The attached projections demonstrate the potential benefits of a change in Trust Fund investment policy.

The Alaska Permanent Fund which has $ 30 Billion in assets has existed for 27 years and is publicly administered. The Permanent Fund has earned an average of 10% for its lifetime Based on five year averages its lowest five year return is 7% and its highest is 14%. The actual investment return of the APFC validates the SS Trustees, CBO estimates and the argument made by President Bush.

Recent articles in the press have described privatization programs of retirement funds in Chile, Sweden and Texas. The Alaska Supplemental Annuity Plan which has been in place for several decades and supplies a good source of relevant data and experience. The current balance in that retirement plan is $ 1.852 Billion. Since this plan replaces social security it provides and has operated since the 1970’s it supplies a good model to measure whether a “private account” system could replace social security and be an improvement. More detail on the Alaska SAP can be obtained at

A study of various philanthropy funds, trust funds, union pension funds, OPEC country investment funds and other efficient investment models would ascertain how the SS Trust Fund could increase its earnings. There may be better models then the Alaska Permanent Fund Corporation to use.

My own experience as a CEO of a company with hundreds of employees trying to invest their 401K in the market cast grave doubts on the viability of millions of Americans individually investing private accounts. The average employee works very hard at his job, has little time to become a genius investor, examine thousands of investment options, track the markets and project macro economic trends impacting investments. Most employees end up being very frustrated, gyrating from one strategy to the next and recording earnings below the market average. Investment fees and costs end up being a very large percentage of the total earnings of the 401k owner. There are many investment professional who take advantage of individual investors – the investment professional takes no risk. It would be much safer and meet the retirement goals of millions of Americans, if independent, accountable experts with no conflict of interests were used to invest the private accounts. The goal of private accounts investing in the stock market can be achieved, but without unnecessarily risking the irreplaceable retirement of American citizens.

There are many models of investment structures with professional investment managers whether it is pension funds, trust funds or public funds. The lessons learned from these models can supply insight on how to safely and effectively structure investment of future social security funds in the broad investment markets.

As you examine long term solutions to the looming social security problems I hope you can examine how much of the problem can be solved by simply changing the investment strategy of the Social Security Trust Fund to achieve what other pension, trust and public funds are already achieving.

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