Kudlow on the Value of Bonds in the Soc. Sec. System

On occasion, Lawrence Kudlow produces an interesting tidbit of information. Take the chart at the bottom of his “Stop the Raids, Start the Accounts”, which shows the total nominal return one would have earned on ten-year Treasury bonds had one invested $1000 in 1977. While the amount of nominal wealth as of 2002 looks very impressive, one should realize that the increase in real wealth would have been less.

Kudlow writes:

The accounts would create ownership and much higher retirement investment returns than the current system will provide. Over the very long run Jeremy Siegel’s work shows about a 5 percent annual return for Treasury bonds. Interestingly, since 1977 that return has climbed to nearly 9 percent yearly. Of course these are risk-free bonds backed by the full faith and credit of the U.S. government. It’s a great way to start personal savings accounts. Under current law Social Security surpluses are exchanged for non-marketable Treasuries placed in the Social Security Administration account. The Supreme Court has ruled that we don’t own them. However, by placing marketable Treasuries in a personal IRA we will own them and we will get a better yield for retirement.

His odd appeal to the Flemming v. Nestor canard notwithstanding, the bonds in the Social Security Trust Fund earn the same return as marketable bonds held by the public – and they have the full faith and credit of the U.S. government. So any claim of a “better yield” just does not square with the facts.

Even if Kudlow confuses nominal return with real return (which seems to be his norm), his chart does suggest that the bonds in the current Trust Fund are accumulating value, which is something his Club for Growth colleagues are trying to deny.