Chapter 11 for Social Security?

Published in Barron’s.

In their Other Voices essay, Dudley Kimball and Robert Morgan said that Social Security will be insolvent in 2034.

In the sense of having liabilities vastly greater than assets, it is deeply insolvent today. Social Security really needs the equivalent of a Chapter 11 bankruptcy reorganization.

Life expectancy for 20-year-old white men in the 1930s was 66—meaning that, on average, he’d get one year of Social Security. Today, a 20-year-old man has a life expectancy of 82.

Social Security has become a complex mix of financial functions. It is partly a welfare program; Kimball and Morgan would make it more so. It is partly a forced savings program with a very low average rate of return. It is partly insurance against outliving your savings. And it is entirely broke in present-value terms, reflecting cash already paid to those who took out much more than they put in.

It is time to draw a line and have a reorganization. Those people who can easily afford it could take substantial haircuts on their future benefits, receiving say 60 cents to 70 cents on the dollar, in exchange for voluntarily opting out of the program. This would make Social Security much less insolvent.

For the other creditors, Congress should step up, write off the Treasury’s loss, put in whatever it takes to pay off the accrued benefits at par, and put Social Security into runoff. To this extent, the government would then have honest, as opposed to dishonest, books. A program designed for the now-irrelevant demographics of the 1930s would slowly liquidate.

Then a sound retirement finance program could be put in place to go forward, based on 21st century demographics. Doubtless, the politics would be interesting. But perhaps starting over offers a better chance than trying to remake the 1930s DC-3 of Social Security into a jumbo jet while it’s flying.

Fed’s mandate is to ensure stable prices

Published in the Financial Times.

Sir, Michael Brownrigg (Letters, Oct. 4) makes a common, but fundamental, mistake in claiming that the Federal Reserve’s mandate includes “low inflation”. To the contrary, in the governing statute, Congress instructs the Fed to pursue “stable prices” not low inflation. Public confusion is understandable, since the Fed endlessly recites the oxymoron that “stable prices” means perpetual inflation (at the rate of 2 percent).

Mr Brownrigg is correct that there is no statutory instruction to the Fed to treat everybody equally. This does not change the egregious fact that the Fed has engineered a massive wealth transfer from savers to borrowers and leveraged speculators. To take a lot of money from some people and give it to others is a quintessentially political act. To whom is the Fed accountable for it?

Iron Chancellor was a good actuary too

Published in the Financial Times.

Sir, “Retirement age for young Germans will have to rise to 69, central bank warns” (Aug. 16). That is a quite reasonable, even generous, retirement age if you are going to live to 85 or 90 or more.

Moreover, it would not be the highest retirement age Germany has had. When Otto von Bismarck introduced the first state pension scheme in the German Empire of 1889, the retirement age was set at 70! Needless to say, on average you were going to live many fewer years after 70 then than now. The Iron Chancellor knew what he was doing, actuarially speaking

Mismatch has led us into trouble many times before

Published in the Financial Times.

Financial events cycle and financial ideas cycle. Here the United Kingdom is again, with real estate generating financial stress. As Patrick Jenkins rightly points out (“Open-ended property funds are accidents waiting to happen,” July 6), this vividly displays “the fundamental mismatch between a highly illiquid asset class and a promise of instant access to your money.”

This same mismatch has led us into trouble many times before. It is why the original U.S. National Banking Act of 1864 prohibited the national banks, as issuers of deposits and currency payable on demand, from making any real estate loans at all. “The property market is already too volatile,” says Mr. Jenkins. Yes, and it always has been.