Colby professors invent bond 2 economics instructors think idea can ‘Save Social Security’

WATERVILLE – Isaac Newton had his apple. Benjamin Franklin flew his kite in an electrical storm, and Albert Einstein thought up his theory of relativity. Now Michael Donihue and Jan Hogendorn could become famous for their Triple S bonds.

Who, you might ask, are Donihue and Hogendorn?

While the two Colby College economics professors aren’t household names just yet, their latest idea could revolutionize the way Social Security funds are received and managed by the United States government.

The two have proposed that the U.S. government issue “Save Social Security Bonds,” or Triple S bonds, to investors in much the same manner as existing savings bonds. Under the pair’s plan, the revenue generated by the sale of the bonds would be earmarked specifically for the government’s Social Security fund and couldn’t be used for general purposes or pork barrel projects.

And unlike economic policy drafted by a panel of economic advisers or a fiscal think tank, the pair came up with the idea late last year while simply chatting about the slowing stock market and its effect on the entire economy. They also talked of plans to pay off the national debt through the use of surpluses, which would eliminate U.S. savings bonds.

“We came up with the idea in the hallway,” Hogendorn said of that fateful conversation. As the two men talked of how best to resolve the anticipated Social Security shortfall, they recalled how more than 80 million American citizens had bought war bonds during World War II to help fight the Germans and Japanese.

The same concept, the pair estimated, could be used today to help save Social Security and still provide investors with a low-risk bond for their portfolios. “Much like war bonds,” Donihue said, “this is a way everybody could contribute to [Social Security] as well.”

Hogendorn said it is a simple reality that something will have to be done to provide Social Security to baby boomers. Triple S bonds, he said, would accomplish that goal while providing a new low-risk method of investing for retirement. “We thought, ‘Well, isn’t it interesting that the one proposal would address both problems,'” Hogendorn said.

The pair began the work of making their ideas known to the general public with the hope of sparking interest among federal lawmakers. In late January, they presented their plan in an op-ed piece in The Washington Post and will present a larger description of the bonds in the March issue of the Federal Manager.

So far there has been little interest in the proposal among lawmakers, but both men say they are confident their plan will be popular among investors and those interested in ensuring Social Security. They say Triple S bonds have the potential to secure Social Security while preventing the need to raise the retirement age or increase Social Security taxes.

The plan has some interesting points to it. Among them is the use of foreign capital to pad Social Security. Currently foreign nations and firms invest in U.S. savings bonds to provide a low-risk means of hedging against the value of their currency. As savings bonds are eliminated with the national debt, those governments and firms will be attracted to Triple S bonds for their investments.

“You’ve got foreigners now helping to fund Americans’ retirement,” Donihue said.

The pair also developed their plan to help improve the investment in public infrastructure by the federal government. As the economy has expanded over the last decade, the pair said, investment in public infrastructure has waned.

In years where Social Security contributions outweigh benefit payments, the pair said, the revenue from Triple S bonds could be used to enhance infrastructure – thereby stimulating the economy and generating extra tax revenue. The decision on which projects to pay for through Triple S bond revenue, Donihue said, would have to be made by a regulatory agency which wouldn’t be pressured by Congress to favor one legislator’s state over another. “Our whole mantra here,” Donihue said, “is that we want to make the economy more productive.”

Both professors said their plan would remain feasible in the event that the national debt isn’t eliminated, adding that there will still be a need to protect Social Security. In that case, the professors said, people would want to invest because they would know their money would be used to secure their own retirement.

They also said that their plan could be viewed as an attractive alternative to the move to partially privatize Social Security – a plan touted by President George W. Bush. Because of market volatility, Donihue said, Triple S bonds could be used as a low-risk portion of an investor’s portfolio meant to hedge against higher-risk market investments.

“It could be we’ve seen all we’re going to get out of this technology-driven economy,” Donihue said. “There is so little downside risk” to the Triple S plan.

Regardless of the fate of Triple S bonds, both men say the problems facing Social Security cannot be ignored. “Clearly we have to do something with Social Security in the long run,” Hogendorn said. “That problem will get worse for 70 years or so, maybe longer.”