Soc Sec XXVIII: Infrastructure; or A New Direction for the Trust Funds

Even before the latest flooding, a group representing engineers said the United States needed to spend about $1 trillion more than it does now to bring infrastructure up to par with modern needs and standards.

Wow. A trillion dollars is a lot of money. But as it happens we have in fact an identified revenue stream that is more or less coincidentally projected to run just about that amount in cash surpluses over the next decade, and more than double that if you include interest accrued on the existing fund balances. That is if we take a little look at the dollar figures in the following table: Table IV.A3.—Operations of the Combined OASI and DI Trust Funds, Calendar Years 2003-17 1 [Amounts in billions]

So here is the deal. First I propose that we take all cash surpluses from FICA and invest them in interest earning state and local construction bonds. That alone gets you about $600-700 billion over the next decade (and all before Social Security is projected to run into a shortfall where cash income from tax falls behind cost). Assuming Intermediate Cost projections. Under Low Cost cash surpluses extend to 2023, and of course under outcomes better than IC but trailing LC you get dates in between. In any event we have a minimum ten year window to invest these already existing funds in infrastructure, and by reinvesting earnings on the muni bonds get pretty close to backfilling the whole gap. Because it gets better. Highway, bridge and school construction are all labor intensive undertakings, even more so when you take into account the wages of the people supplying the concrete and steel, to say nothing about the wages of the people who sell groceries and beer to the guys that spend their days working at the cement plant. Which is to say Social Security not only earns whatever return it gets directly on the bond, it also captures 12.4% of every contract dollar that ultimately goes to wages. Cha-ching!! I don’t know how you would calculate the Return On Investment on that combination. But I suspect you are creeping real close to double digit returns.

There is a risk that the budgeteers, being deprived of this source of cheap borrowing, would simply respond by cutting transportation spending from the General Fund. But not only is this response not likely, it wouldn’t really matter if it did happen. Why? Well follow me below the fold.

Why would a total spending offset be unlikely? Because Congressmen and Senators really, really like to take credit for infrastucture projects, that is how you get highways, bridges and airports named after you. If you set up a system where Social Security surpluses were invested evenly by Congressional District it would be hard for any individual Congressman to claim credit, after all it is just workers’ money being reinvested creating jobs for workers. So I suspect some extra money would always be flowing, earmarks are not going away totally, transformed perhaps but not vanishing.

As to why spending offsets wouldn’t really matter so much if they happened. Well as long as the total effect isn’t negative, that is less net dollars going to these kind of projects, the total benefits far outweigh the foregone spending. But before we go there let me put stage two into play.

Along with using the current cash surpluses I would argue that the General Fund should take a proactive approach to the Trust Fund and invest an amount equal to the amount of the interest being accrued on the current Trust Funds into the Infrastructure Investment Fund. This would have the effect of freezing the Trust Fund in place at about $2.6 trillion (if we could get this done in 2029 2009). Which is not a bad thing, not at all. Freezing the Trust Fund means freeing our children and grandchildren from trillions of dollars in future General Fund debt. Of course they will be on the hook for paying off the transportation and school bonds but at least they will be able to see what they were paying for in literally concrete terms.

Now it is worth noting that funding for the Infrastructure Fund doesn’t stop at the actual shortfall date when income from taxes trails costs, as long as the interest being earned on the Trust Fund exceeds the remaining gap the Infrastructure Fund would still be credited with the overage, under Intermediate Cost projections you would be getting some money from this mechanism all the way until 2023.

At which point we would need to make a decision. The easy answer would be to start drawing down on the assets of the Infrastructure Fund, that is rather than reivesting its earnings we could start using them in conjunction with Trust Fund redemptions to extend the period when the General Fund has to transfer cash. Or we could simply bite the bullet and pay for the entire gap between income from tax and cost by direct redemptions of the Special Treasuries. The net result would be that the Trust Fund would be reduced to its target of a 100 Trust Fund ratio even faster than projected. On the other hand this would give the Infrastructure Fund that many more years of compounding through reinvestment.

So what is the end game here? Well some fifteen to twenty years down the road we have us a Trust Fund holding its accepted minimum level of reserves, still presumedly held in Special Treasures. We also have a revenue stream via FICA and tax on benefits that was significantly augmented by additional wage dollars from the infrastructure investment in the meantime. Then we have an independent Infrastructure Fund that can be tapped to backfill any gap between then current income and then current cost.

I kind of like this picture. One it puts the intergenerational equity problem to rest for all time, current benefits would be paid out of a combination of current tax and current returns on real assets. Two it blows away the phony ‘Phony IOU’ argument. Three it shuts up those who would blather about how returns on equities magically out earn returns on Treasuries, they simply will not be able to match the reliability of munis at equivalent rates of return (or go for it in comments). Four and most interesting perhaps it moves financing of Social Security into progressive directions without it being turned into welfare. Because states and localities have two major sources of income: property tax and sales tax. Want to live in that big ass house, really need that thirty foot speedboat, or sixty foot cruiser, or houseful of designer furniture, or that Bentley? Well know that some portion of your property tax and sales tax is going to repay bond dollars borrowed from wage workers. Instead of approaching Mr. Rich cap in hand for a handout, Mr. Worker ends up in the position of creditor.

All in all a lot better way of securing some infrastructure funding over at least the near term than trying to raise it through the Lotto.