Financing social security; bonds in retirement

"It's no secret that Social Security is facing a long-term financing shortfall" begins a recent paper by Alicia Munnel, Director of the Center for Retirement Research at Boston College, who discusses whether a portion of Social Security should be financed with the income tax, or general revenues. Munnel notes the two components of Social Security costs: the contributions that generate current benefits and contributions "to make up for paying benefits to early participants that far exceeded their contributions." It is the latter that needs shoring up. Her conclusion:

...the shift from the payroll tax to general revenues for the portion of the system’s financing associated with the start-up of the program would represent a more equitable sharing of the burden. At the same time, through the payroll tax workers would be paying an amount for their benefits equal to what they would have paid had a trust fund accumulated.

In another paper from the Center, research economist Anthony Webb argues that for retirement income security, households should seek return on capital over return of capital. He briefly discusses short-term deposits, long-term bonds, and Treasury Inflation-Protected Securities (TIPS). He states, "...the true risk-free asset is a portfolio of bonds and, in particular, inflation-protected bonds of appropriate maturities."


Should Social Security Rely Solely on the Payroll Tax?
      Report, IB#9-16 (pdf, 7pp/188kB), Aug. 2009
      Summary

The Case for Investing in Bonds During Retirement,
      Report, IB#9-17 (pdf, 6pp/156kB), Aug. 2009
      Summary