February 2005
Option 2 - Inflation-Indexed Returns:
One option that holds particular promise is to structure the program so that returns are indexed to inflation. This will achieve results similar to the recently commissioned Series I Savings Bond. The rate of return for an I Bond is calculated by combining a 30-year fixed rate with a semiannual inflation rate. Therefore, the I Bond is engineered to return a fixed rate over inflation, and this provides investors with a guaranteed real rate of return.
I have created several simulations that assume a fixed base rate of 4.5% and an inflation rate that is capped at 3.5% to protect taxpayers from excessive liabilities. In return, these investments will not be subject to debit interest during periods of negative inflation. Therefore, the maximum possible annual return is 8.0%, and the minimum return is 4.5%. However, retirement distributions will be taxed at applicable rates. Coincidentally, the current average interest rate for the 30-year Treasury Bond is also 8.0%. There are currently over $539 billion worth of Treasury Bonds in existence, and these bonds cost the American taxpayers more than $43 billion in annual interest payments.
As previously noted, the U.S. Treasury has discontinued use of the 30-year Treasury Bond as a financing instrument for the federal government. However, many private pension plans are dependent upon investment in 30-year debt, and the absence of the Treasury Bond has created additional difficulties for pension managers. This plan has been engineered to supplement the traditional employer based pension plan, and it will provide a long term debt instrument while protecting American workers from a loss of pension due to corporate layoffs, scandals, or bankruptcies. Not to mention that it will also provide the government with stable long term financing. While Treasury Bonds may no longer be issued, the government will still need to find replacement financing for these bonds as they expire. Therefore, this plan will benefit everyone.
The benefit to this option is that it will finally allow Social Security to achieve partial advance funding. When the trust fund has become fully financed by this plan, workers may begin to divert a portion of their payroll taxes to this plan. Once partial advance funding is achieved, additional payroll taxes may then be diverted to finance the interest premium that this program demands. In the future, a majority of our national debt will be financed by this plan, and one portion of a worker’s payroll taxes will be used to fund their own personal account while the remaining portion will be used to make the interest payments for other account holders. Retired persons will receive monthly distributions that are essentially interest payments.
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