On Tuesday, the U.S. Treasury offered billions of dollars of four-week bills at an interest rate of 0% … and that issue was oversubscribed by a factor of four! Three-month bills are currently yielding about 0.01%, the lowest level since 1929, when they were initially offered. And long-term rates are hovering around 3%, some of the lowest levels in decades.
These super-low rates me got brainstorming, and since everyone else is offering out-of-the-box ideas with regards to the economy, I thought I’d chime in with one that, in my view, makes a lot of sense. I won’t spend too much space on it, since, let’s face it, the idea won’t become law. Or maybe it will?
Here’s the thought: I believe the U.S. government should borrow an extra $1 trillion, or even more, in floating long-term Treasuries, and use it to pre-pay some of Social Security’s future shortfall. I know you’re probably thinking, “Great, Mike, just what we need–more debt!” But I honestly think it would work.
Here’s why: Uncle Sam can effectively borrow at 3% rates for the next 30 years, which is not only historically low, but in all likelihood, is going to be less than the average rate of inflation during that time. Maybe if such a huge borrowing was announced rates would tick up, but mybe not. After all, we’re set to borrow huge sums of money in the quarters ahead, yet interest rates are sitting at multi-decade lows.
So here’s the plan–first, contact everyone over, say, 50 years old during the next few months, and offer to “buy them out” of their Social Security benefits. Of course, the amount paid would be less than what’s owed to them because of the time value of money; cash in hand today is worth more than money given out over the next 10, 20 or 30 years. It’s the same reason lottery winners usually choose to get paid upfront (instead of getting a 20-year annuity), even though, if they took the monthly payments, they might make more money over time.
Once you have a tally of who’s committed to such a program (participation would be optional), the Feds could go out and borrow however many hundreds of billions (trillions?) of dollars needed. And do it for a ridiculously low rate of 3% … or maybe 3.5% if rates rise a bit.
Won’t that flood of bonds eventually have a negative impact on rates? I’m not so sure. Remember, investors aren’t stupid, and they know not only how many bonds the U.S. actually has outstanding, but also the governments’ future liabilities (Medicare, Medicaid, Social Security, etc.). Thus, it’s true that enacting this plan would increase the amount of bonds in the marketplace. But in terms of the total debt–both bonds, plus future liabilities–that figure would decrease, or at least, stay the same.
Now that it’s exactly the same situation, but during World War II the U.S. floated a tremendous amount of debt–the total public debt outstanding was valued at more than the country’s entire GDP! Yet because the market had confidence the money was being put to good use, it financed the war at interest rates in the 2% to 3% range. We could do it again.
Taking a step back, what’s the advantage of doing this? For the same reason any big, old company might pay part of its union’s pension upfront–to get it off the books. In effect, Uncle Sam would be refinancing some of its debt; it would eliminate future pension responsibilities (and thus, avoid some of the unpleasantness of lowering benefits or raising taxes in the years ahead) with super low interest rate-debt. I think it’s an idea worth exploring.
I realize many people may disagree (including Tim, who’s written repeatedly about the unwinding of the debt build-up in recent decades). Either way, I’d love to hear your thoughts.
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7 responses so far ↓
1 Albie Davis // Dec 11, 2008 at 6:02 pm
Mike, Fascinating concept!
Mind-blowing, actually. I’ll have to read this a few times, but I think it makes sense.
A couple of weeks ago I reserved a web site address: http://www.KitchenTableOfAmerica.com for $9.99 a year from Network Solutions with the thought in mind that we should have a national conversation, a la the election metaphor, “at the kitchen table” about Family Values, that is, how does each family at the kitchen table level express their values through the way they spend, save, giveaway, or hide in their mattress, the money available to them. For example, up here in Maine many of us like to “buy local,” and we keep on “fixing things” rather than buy something new. What are the broader consequences of such attitudes?
I probably won’t ever build up the web site. I don’t have the knowhow, skills, or maybe even the inclination. It may have been a foolish way to spend $9.99, but I couldn’t resisit.
Warm regards, Albie Davis
2 Andy Leslie // Dec 11, 2008 at 6:51 pm
Mike,
I like the “out of the box” thinking, and I believe that in a perfect world your cutting edge idea might even stand a chance of succeeding. Unfortunately we do not live in a perfect world, a fact that I am reminded of each time I think about my 401k, and IMO not only would your plan fail, it would led our senior citizen population into choas. At the most basic level your plan would be doomed by simple human nature.
For starters I’m going to call your plan the “Senior Citizen Economic Stimulus Act of 2009,” or SCES09, for short. I believe participation would be great because it would be endorsed by the AARP. Why would the AARP endorse it, you ask? Senior citizens with billions of new dollars would mean increase business for AARP memberships, AARP insurance, AARP travel, AARP investments, and most of all AARP political influence. Influence they will need at some point in the future to convince Congress to give Grandma Jones more money because of one or more of the following reasons: 1) she didn’t have the capacity to understand that this “buyout” was a one shot deal and when it was gone, it was gone; 2) she was swindled by one of the thousands of slimeballs that suddenly show up anytime an opportunity for easy money exist (I’m from Hurricane Katrina country); 3) she did invest it, but suffered losses in the stock market; 4) she signed a huge chunk of it over to her local hospital/physician to cover medical costs because they scared her into thinking that she couldn’t come back if she owed them money (see #2); 5) and the most likely senario, one or more of her worthless adult children “borrowed” a portion of it, stole a portion of it, or encouraged Grandma Jones to take the family on a two week vacation to DisneyWorld, or to buy that wonderful little grandchild a $4,000 Plasma TV for Christmas (among other things).
I know that I sound a bit jaded, but I work with Seniors and their money and while I’m not going to say that I’ve seen it all, well…………
On the positive side, such an influx of capital would probably do wonders for the economy.
Merry Christmas,
Andy
3 Cindi Showalter // Dec 11, 2008 at 6:57 pm
My husband and I are both 54 with maximum paid in for many years. Given the choice, we would have him (shorter life expectancy) opt for the payment in full, and then have me wait until age 70 and collect maximum monthly benefit. We would take this alternative in an instant!
Cindi
4 Mike Timlin // Dec 11, 2008 at 7:11 pm
Michael, your concept is a different, interesting look at Social Security, but it looks like a ’stealth’ privatization and misses some points:
1. Social Security was set up to avoid us having millions of destitute people who could not work at 65 (due to health) or could not get work at 65 (due to age discrimination). Your proposal could set us up to have millions of destitute seniors over the next 15 years, which is very bad for society. I’d rather pay them a little bit every year and force people to budget than to give them large, lump-sums and run the risk of gorging now and starvation later. It’s just not worth it.
Also, your proposed plan presumes that there are better places to invest money than in the Treasury bonds which the Social Security Trust holds. Over the last 10+ years, money in a mattress has outperformed the S&P500, so it’s not clear that high yields are in our future. Social Security money should stay in Treasuries and not be exposed to stock market risks.
Social Security is not in deficit; in fact, it has a large annual surplus, and it will have one for at least 10 more years. Under pessimistic economic assumptions, the accumulated surplus will last at least until 2041; under more optimistic assumptions, it will last forever. Let’s not ‘fix’ something that’s not broken nor is likely to be broken.
Finally, we should be looking at how to fix Medicare, which is coming under much more stress. We should also look at how we can extend Medicare coverage down to age 50 to cover older workers who are being hit hard now by layoffs and losing their health insurance.
We just can’t rely on Wall Street to manage vital necessities, such as retirement and health insurance, so we need to beef up Social Security and Medicare, not privatize them.
On the other hand, the markets are a great place for people to invest their ‘extra’ money, that is beyond what they need for food, clothing, shelter, health insurance, and retirement.
Thanks for keeping us on our toes, Mike.
5 Myron Martin // Dec 11, 2008 at 11:31 pm
I suppose you also believe that the CURE for a falling down drunk is another bottle of whiskey?
My point is that our economic problems are already a result of TOO MUCH DEBT? HOW does creating MORE DEBT solve the problem of too much debt?
Seems to me when a SYSTEM dosen’t work, (which should be obvious by now) one would realize that “doing the same thing while expecting different results” is a good definition of insanity!
Isn’t it time we began thinking “outside the box” by aking some basic questions such as:
1) WHY do we have to go into debt to obtain the things we need for a functioning society?
2) Borrowing immense sums of money has been suggested as a means of “kick starting” the economy and there certainly is no lack of a wide variety of infrastructure needs, both NEW and repairs to roads, bridges, water and sewer lines ad infinitum.
My queston is, WHY BORROW the money from the private banker operated fractional reserve fiat money banking system and end up paying for it twice in INTEREST on the bonds?
It is time the government took back the printing plates and CREATED the money as a credit instead so the bonds could be retired through taxes for just the principle saving almost half the cost in most cases.
The principle we should be working on is very simple, “anything that is physically possible and desirable (for the good of society as a whole) CAN and should be made financially possible”!
The only questions that need to be asked are;
1) do we have the necessay raw materials; and 2) do we have the people available that need jobs and can be trained as necessary to get the work done!
Since our fiat money is already created by government decree and is backed by the full faith and credit of the government, the same thing that makes a dollar bill created by the private bankers GOOD, (the taxing power of the government) would make a direct monetry creation of the government good, but WITHOUT the interest paid to the private bankers.
They could be allowed to continue their predatory lending practices to private corporatios and individuals willing to pay for their services, but anything government related should be issued as a CREDIT for the benefit of ALL citizens who elected them. The reduction in taxes by eliminating interest payments would be a tremendous stimulation to the economy.
Instead of socializing debt and rolling it over to be passed on to future generations we should be using SOCIAL CREDIT to utilize our natural resources to benefit ALL citizens!
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