1 SOCIAL SECURITY’S INVESTMENT SHORTFALL: $8 TRILLION PLUS-AND THE WAY FORWARD Plus How the US Government’s Financial Deficit Reporting = 64 Madoffs

While most nations ’ public pension plans have long invested in equities, the Social Security System of the United States stands virtually alone in limiting its investments to non-marketable US Treasury Bonds. This paper traces on a monthly basis what would have happened if a balanced approach combining passive investments in marketable long-term government bonds and stocks from its beginning in 1937 had been employed instead. Under conservative assumptions, the Social Security Trust Fund, other things being equal, would have been $7.6 trillion larger at the end of 2010, with an ending balance of $10.2 trillion. But other things would not be equal: the cumulative wealth effect would have given a positive push not only to the Trust Fund but to economic growth. In addition, the Unified Budget of the United States, which since 1970 has understated the country’s fiscal deficits by $4.15 trillion, would probably never have been born or met an early death. Not surprisingly, the invested Trust Fund’s economies of scale, miniscule fees, low administrative costs, and other efficiencies could not be duplicated by privatized accounts, which also suffer from huge productivity losses and in many instances are subject to moral hazard. To rescue the Social Security System from being a political football, it needs to be made independent, with a status similar to that of the Federal Reserve System