A single Washington decision, in 1983, would have nearly doubled the value of the Social Security Trust Fund. That decision would also have made the retirement of today’s workers far more secure. With a reported balance of $2.68 trillion at the end of 2011, all invested in special Treasury obligations, the trust fund would have been worth $4.99 trillion if it had instead been invested in gold.
Of course, that decision wasn’t made. Gold is, after all, a “barbarous relic.” And the dollar is purported to be almighty. Building the trust fund was important in 1983 because it contained only $24.9 billion at the end of that year. That’s not much more than pocket change, enough to cover benefit payments for fewer than eight weeks. Basically, the trust fund was more like a checking account with a low balance.
And that’s why it was decided to have all of us worker bees pay more taxes. Paying more than was necessary to pay benefits would build the trust fund to a respectable amount. Indeed, the idea was to build the fund to an amount large enough to cover the benefits that boomers would have a right to claim when they started to retire in droves.
That would be now.
So our surplus employment tax dollars were invested in Treasury obligations. The obligations earned interest. The interest, in turn, was credited to the trust fund in the form of still more Treasury obligations. From a small surplus over expenses of only $2.8 billion in 1984, our surplus payments grew to peak at $90 billion in 2001, reaching a cumulative peak of $1.21 trillion in 2009. Add the earned interest, and you get the trust fund total of $2.68 trillion for 2011.
That’s a lot of money. It’s also our money, taken from the wages of every worker in America. It is money we could have used to pay for food, education or invest for retirement.
Instead, our two worthless political parties spent the money to build or maintain their own power. Democrats used it for spending projects. Republicans used it for tax cuts. And today, the Social Security Trust Fund is just another creditor of our perpetually cash-short Treasury. Recently, the Treasury owed $11.07 trillion in public debt and $4.8 trillion to other government agencies, with Social Security being the largest. Total debt is $15.88 trillion.
If our surplus dollars had been invested in gold, the trust fund could have bought more than 7.7 million ounces with its $2.8 billion surplus in 1984. It could have added to its hoard each year, building to a total of more than 3 billion ounces at the end of 2011. At a 2011 average price of $1,571.52 an ounce (about $40 less than the current gold price), the hoard would be worth nearly $5 trillion.
Would this be a free lunch? Sorry, there is no such thing. Here are three side effects of building a gold trust fund:
• Without the Social Security surplus to tap for cash, our government would have had to borrow the same amount of money from other sources, such as China. So publicly held debt, with accumulated interest, would be about $2.7 trillion larger.
• Our government would be paying actual cash interest on that debt rather than simply issuing more Treasury obligations as interest payments. This would have put pressure on other spending.
• And since gold earns no interest and was flat in price for years, a gold trust fund would have seemed like a really bad choice for many years. The value of the gold fund would not have exceeded the value of Treasury obligations until 2008.
Except for one thing: The world supply of gold is limited. Trying to buy 3 billion ounces would have moved the price higher, earlier. Perhaps much higher.
All of this, sadly, is a “woulda-coulda” fantasy — a road not taken. It can, however, guide us in our personal decision about whether to prefer government promises or gold for our own savings. That guidance now suggests it is time to prefer gold to dollars.
Here’s one indication. According to the Global Debt Clock on the Economist magazine’s website, global government debt now totals about $46 trillion. With the global inventory of gold at about 4.8 billion ounces, that means backing government debt with gold instead of more government promises would put the price of gold a bit more than $9,580 an ounce — about six times its current value.
Questions about personal finance and investments may be sent by email to scott@scottburns.com.