Nearly 17 years ago, Donald G.M. Coxe testified before a subcommittee of the Senate Finance Committee on Social Security's investment policy.
"Had the controversy that broke out that morning been resolved differently, Social Security wouldn't be facing negative cash flow as early as 2018, or ‘bankruptcy' by 2042," Mr. Coxe, chairman and chief strategist at Harris Investment Management Inc., Chicago, recalls in his latest Basic Points monthly investment strategy analysis for clients.
The testimony he recounts has nothing to do with personal accounts, a form of which President Bush has proposed — not the subject of Mr. Coxe's appearance before the subcommittee, then chaired by Sen. Daniel Patrick Moynihan. Mr. Coxe was asked to address Social Security's so-called trust fund.
The trust fund was then only a few years old, having originated in 1983 under legislation by Sen. Bob Dole and Mr. Moynihan, Mr. Coxe remembers.
The Moynihan subcommittee was reviewing the operation of the trust fund, which was modeled on the Canada Pension Plan. The subcommittee asked Ottawa to send someone to testify. CPP officials recommended Mr. Coxe, then working for Wertheim Schroder & Co. in New York. Mr. Coxe had served six years on the CPP advisory committee and six more years on a royal pension commission in Ontario.
The CPP was set up under an arrangement between the Canadian federal government and the provinces, except for Quebec, which set up its own plan, creating the Caisse de Depot et Placement du Quebec.
As Mr. Coxe recalls, the Social Security trust fund's "investment performance was miserable in comparison with CPP" (or the Quebec plan). The trust fund was invested in special Treasury bonds, "whose yield was ... well below the yields on long bonds. But it also meant that the fund's assets roll over at an unseemly rate for a plan whose liabilities are measured in decades, an asset-liability mismatch on a majestic scale."
Mr. Coxe notes he explained to the subcommittee the workings of the yield curve and why CPP, using 20-year debt at market interest rates, was getting far higher returns.
The trust fund's "misconceived investment policy means (it) will be exhausted years before a fund invested in a fashion more appropriate to the duration of its liabilities," Mr. Coxe writes.
As Mr. Coxe recalls, Mr. Moynihan mentioned to him, "I'm going to try to get the committee to send a direction to the government about the investment policy, but I'm not optimistic that it will happen."
"So why is the world's biggest pension fund invested in a fashion designed to produce low-yielding assets that bear scant relation to its liabilities?" Mr. Coxe asks. Republicans and Democrats "understood that by lending out gigantic sums to government at cheap rates, the fiscal deficit is reduced."
Now even Democrats should demand the trust fund start earning a market rate of interest on its bonds "that would keep the fund intact longer," he suggests.
Mr. Coxe's report to clients — really a minimonograph — provides more insightful details and astute analysis and suggestions.
President Bush's proposal to permit voluntary personal investment accounts for part of individual Social Security contributions is a great reform; yet it doesn't address the trust fund management, whose bond mismatch will be a perpetual problem unless the personal account proposal is eventually expanded to absorb all of Social Security.
The subcommittee ought to ask Mr. Coxe to return to testify. Maybe now Congress would adopt his suggestion, which would delay the trust fund reckoning by increasing its bond returns and, for those who favor personal accounts, alleviate funding pressure that moving to them may cause.