Securitizing for the future

Last week, former Nebraska Senator and current New School University President Bob Kerrey gave the second lecture in a series of four speeches on Social Security at the University of Pennsylvania. But while we students might find lighter subjects more enticing, Kerrey's topic -- Social Security and its future -- is the most important issue facing our generation. As Washington considers reform, it is imperative that Penn students, and emerging generations of Americans everywhere, pay close attention. For younger people, Social Security is a disaster. We are paying into a system that we neither believe will survive nor really need. Some polls show that more young Americans believe in UFOs than believe that they will collect Social Security. Nevertheless, we will continue being taxed -- money that we need as we start families, buy houses and build our lives -- to support older generations. Furthermore, generations X and Y don't think of Social Security as a substantive part of retirement income. In short, Social Security has become a more obsolete retirement vehicle for future workers. We will work in a world that plans for retirement with programs like 401(k) plans, and a heavily marketed awareness about the importance of personal planning. Regardless, the reality is that government will never end mandated retirement savings. But government must put our money to better use. Private savings accounts are a step in the right direction. Privatization will help us to accumulate substantive wealth when we reach retirement. And that is important. But there might be other ways to increase the utility of the Social Security system for younger people. What Washington has not thought about are ways to put Social Security funds to work for us right now. One possible system might be to allow individuals to sell or borrow against their future Social Security benefits. Government has pledged to return our money, similar to their pledge to return money to government bond holders. And just as you can sell a bond for cash today, we should be able to sell our Social Security benefits too. It would work like this: Voluntarily, people would place the rights to their future Social Security payments in a trust, a financial intermediary. The trust would then be sold, with the proceeds returning to those who participated in the trust. People would only receive a part of the future value of their Social Security benefits, based on the age of the beneficiary, interest rates and people's faith in the government. There would also be a large buyer market for these trusts. Insurance companies and banks would be interested because this would offer them a means to buy government-backed securities. Trusts could be securitized -- packaged up into large denominated bonds -- similar to how Fannie Mae securitizes mortgages. And with the Treasury decreasing the supply of 30-year bonds, these would fill a growing need for long-term, low-risk securities, and could even be traded in secondary markets. Securitizing Social Security would have its problems. For one, some people could irresponsibly squander their money in the present while losing their future benefits. Others might find that after a discount, their present value of their Social Security is too small to be useful. And legally, there would be pitfalls such as whether people can even transfer their benefits to third parties. But the potential gain could be big. People would undoubtedly have more liquidity; they could borrow at lower interest rates using Social Security benefits as collateral, or help pay for education. It also would offer people flexibility in terms of their exposure. A private savings account creates risk; securitization allows people to tailor it. Individuals who won't need to rely on Social Security benefits could find ways to use that money more effectively now. It creates a new financial service for business, as well as a dynamic secondary market. And it helps our politicians by reducing the conflict of interest between younger and older voters. While securitization would be complicated, the idea isn't radical. In fact, government and corporations have been using securitization for a long time. For example, people have long been exploring ways to enable individuals to borrow against 401(k) savings. We can benefit from Social Security money not only in the future, but also in the present. Washington should consider reform with this in mind. It is something that all Americans would appreciate. While Kerrey has left Washington, his addressing a college audience serves as a reminder that young people also have an interest in Social Security reform. Leaders that engage us, and who bring forward-looking and dynamic solutions to bear, will win the respect -- and votes -- of emerging generations.

Please note All comments are eligible for publication in The Daily Pennsylvanian.