As informal financial advisers, community bankers are frequently asked their views on economic developments.
Sometimes they are forced to talk their customers out of taking certain actions, such as increasing an already-heavy investment position in a certain sector of the market, or taking on more debt than they can reasonably handle.
But often the most important way a community banker can aid his or her customers is by simply calming their fears about economic issues.
Take Social Security. We hear worries that as matters now stand, the Social Security system will be bankrupt in about 30 years. That information certainly does not cheer the 40-something bank customer, but it should be obvious to bankers that these fears are unwarranted.
Social Security is a defined benefit plan, not a defined contribution program. The monthly benefits are set by Congress, and how the government gets the money to meet these payments does not affect the amount recipients get.
If Social Security were a defined contribution program similar to, say, a 401(k), where what you receive depends on the amount you contribute and what it earns then the impact of Social Security tax collections and how the proceeds were invested would mean a great deal to the public. But since it is a defined benefit program, the moneys source should be of no concern to recipients.
How the government finances the Social Security system does concern us as taxpayers, though. Obviously, if we need more money to cover Social Security obligations, it must come either from taxes or from deficit finance, a potentially inflationary practice.
This is why so many people feel that Social Security funds should be invested in stocks or higher-yielding bonds instead of the low-yield government obligations used now. Their reasoning: If the trust fund can earn a higher return, it will take fewer dollars from the taxpayers to cover the systems obligations.
But the amount the trust fund earns on its investments is really bookkeeping fiction. All the money that we pay into the Social Security system goes into the Treasurys general funds, and all payments come out of those funds.
Calling Social Security collections a separate fund instead of just part of the overall government revenue is simply a way of making the payment of Social Security taxes look more palatable to taxpayers by specifically allocating part of the revenue collected to an area we all appreciate and expect to depend upon eventually. After all, 80% of Americans pay more Social Security tax than income tax, if you include employer contributions.
Who benefits from the fact that the Social Security trust fund now earns only about 2% a year? The Treasury does, as the money is invested in low-yielding Treasury bonds. Were the trust fund to be put into bonds that earn, say, 5%, the Treasury would have to raise taxes or borrow more to cover the higher interest payments in effect borrowing from Peter to pay Paul.
As long as the United States is solvent, so is Social Security.
Bank customers may still have a number of things to worry about, but Social Security collections and payments should not be one of them.
Mr. Nadler, an American Banker contributing editor, is a professor of finance at Rutgers University Graduate School of Management in Newark, N.J.