Friday, April 08, 2005

Risk Free?

This is not my editorial comment, I just thought it was funny. President Bush was disparaging the safety of the IOU's held by the Social Security Trust.

The New York Times > Opinion > Editorial: Shameless Photo-Op

For the record, all bonds are just IOUs! And as for the credit worthiness of the debtor, let's hope we don't need to worry about that!It is the US!!! Maybe President Bush does not realize that those IOUs are largely assumed to be risk free!

"He posed next to a file cabinet that holds the $1.7 trillion in Treasury securities that make up the Social Security trust fund. He tossed off a comment to the effect that the bonds were not "real assets." Later, in a speech at a nearby university, he said: "There is no trust fund. Just i.o.u.'s that I saw firsthand.""


dnb said...

I know making fun of the president is fun for you academics. But Let's think about this.

Those Social Security trust fund bonds are an IOU from the government TO ITSELF. Big difference. You can "borrow" five hundred dollars from yourself for a new TV. You can even write yourself an IOU. But when the rent is due, that IOU isn't all that valuable.

Luckily, those bonds don't have a maturity date (unlike other bonds -- they really are unique instruments). So if we manage to fix Social Security, we can push off redeeming them indefinitely while still meeting obligations. Or, we can do nothing and watch the train wreck.

In 1950 the system had 16.5 workers for every beneficiary. Now it's just over three, and soon it will be two. That won't work, professor. Taxes have already been raised twenty times.

By the way, there's no such thing as a free lunch. Off the top of my head, I can think of two forms of risk these bonds carry. One is the opportunity cost of holding low-yield instruments, and the other is legislative risk -- congress doing something drastic. While every investment holds some legislative risk, it's hard to argue that the risk isn't especially great with the "trust fund" bonds.

Anonymous said...

Here's the rub, Social Security was never intended to be a permanent entity. While I do NOT agree with taking away benefits from those that have contributed, it is absolutely time to find a way to phase out this antiquated system that has no real place in society today. That may sound harsh, but part of the reason we are in the boat we’re in today is the fact that as Americans we often feel like “the world owes us something”. I am constantly amazed at the entitlement persona that so many people have. It is time we started taking personal responsibility for our own well being and save for retirement (not hold out our hand for our ration of government “cheese”.) The only way to get people to change is to give them no other alternative. When was the last time you made a change that was “good for you” because you wanted to?