The Problem of Social Security Solvency, Beneath the Monetary Facade

It seems likely that the problem of SS solvency is generally thought of as a problem of financing, possibly described by accounting. In this view, the inevitable retirement of the Baby Boom generation will result in a reduction of payroll tax receipts and an increase of SS payouts, resulting in a substantial SS deficit as less and less workers are available to pay the payroll taxes that support the payments to each retired SS recipient.

To the extent that this view prevails, the proposed potential remedies are some combination of increased payroll tax rates, additional tax sources, increased government borrowing, and reduced benefits, including both uniform reductions and means-tested payments, and monetary supply inflation combined with deliberate under-adjustment of payments for price inflation.

In addition to the remedies noted above, there are possibilities for major structural change or replacement of the entire SS System, including a variety of schemes generally referred to as privatization which attempt to fund the payments from investments in the public financial markets.

It will be taken as an established given that the so-called Social Security Trust Fund is nothing more than a book-keeping device, whose existence has no economic significance to the ability to make future SS payments.

The common flaw in all of the proposed remedies above is that they focus on dollars and money. This is too narrow and ignores the fact that the primary end goal of an economy is the actual consumption of goods and services. Production would be pointless unless the goods produced are expected to be consumed. Exchange-valued goods, including money, would have no value unless their holding is expected to fund potential future consumption.

If a detailed digital record of the economy over time is stored, it can be usefully abstracted by retaining only the records of the actual goods and services consumed and discarding all records of production, money and prices. The standard of living is the result of consumption alone, at least if, for simplicity, we ignore any apprehension about the future and the disutility of the labor involved in production.

With this approach, the proposed remedies above need to be compared in terms of their effect on the level and distribution of consumption. If we temporarily assume that none of the remedies affect the total supply of goods and services, then the effects of all of the remedies can be reduced to how they change the distribution of goods and services among future workers, future retirees depending on SS payments and future retirees depending on their own savings and investments. If no such thing as SS existed, the same conflict would still appear between workers and retirees as they compete for scarce consumption goods.

From this viewpoint, the fundamental problem is not a shortfall of tax revenue to meet payment promises in terms of dollars (which is not the same as promises in terms of goods), but the loss of the productive labor factor represented by the retirees and the subsequent reduction in the supply of goods and services.

If we continue to narrowly focus on the money-centric approach, the only questions are how goods and services are to be distributed between workers and retirees and just which only superficially different methods will be employed.

On the other hand, a broader approach is to concentrate on the total supply of goods and services themselves. While it is not feasible to import workers to significantly increase the payroll tax base, it is certainly feasible to import the goods that they can produce in their own countries. The future is one of U.S. labor shortages, not excesses. To maximize the supply of goods and services, importantly affordable goods and services, they must be able to be produced at a profit. This means that all artificial costs and impediments must be significantly reduced or eliminated, including taxes and regulations of all types including anti-trust and protective tariffs.

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Thanks for the fresh

Thanks for the fresh perspective, Don.

Most of my wife's and my retirement needs are pretty simple: own our home, and secure a small regular income for groceries, transportation, utilities, and some hobbies. The big unknown in our retirement plans is health care costs. As long as the guv-mutt keeps dumping mandated money into health care and driving up the costs, it makes it difficult to plan how much we need to save to cover them. I suppose we can invest that portion of our savings in a proxy for health costs (like pharmaceuticals) to try to hedge against inflation in this sector. Bonus points if we take our money back out again just before it collapses under its own weight.

Of course, efficiency and automation can also take up the slack for labor shortages. This week's Economist has a few articles on this subject. After reading your post, I read their opinion piece, but didn't get as much from it as I had hoped. I thought it might examine how much of (to paraphrase you) "the goods and services we actually would want to consume" could be met through automation.

The real solution is to

The real solution is to improve productivity of the productive individuals by accumulating useful capital. The SS system does not accumulate any capital as far as I know. If it has any capital assets it is probably some useless FedGov boondoggle.
If SS was abolished, individuals could use the extra money to purchase goods, property and shares which would increase their real capital. Needless to say, this ain't gonna happen.

The real solution is to

The real solution is to improve productivity of the productive individuals by accumulating useful capital.

I heard the same argument applied toward US workers in regards to their SS and Medicare accounts last month that I heard applied toward third world workers in regards to their land a few years ago. Namely, that if the individuals had direct control of their assets, instead of being merely allowed the temporary use of those assets by their governments, we would have a lot more useful capital and the world would be a better (or at least more productive) place.

"If we temporarily assume

"If we temporarily assume that none of the remedies affect the total supply of goods and services" "the fundamental problem is...the loss of the productive labor factor represented by the retirees and the subsequent reduction in the supply of goods and services."

I'd use the second observation to challenge the assumption in the first one. We can change not only the distribution of goods and services, but also their amounts, through policies which encourage more productive work. Reducing benefits accomplishes this by giving retirees incentive to work. It has a double effect, as by preventing the need for tax increases on workers it leaves workers with more incentive to work.

Whereas if we increase taxes to maintain benefits, now the workers *and* retirees will choose to work less.

I don't see why its not feasible to increase workers to help the payroll tax base. An immigration policy of admitting any revenue-positive immigrant would do this, as long as there is demand to go work in the US (which is sure true now).

[...] s, and by 2069,

[...] s, and by 2069, funding shortfalls will exhaust all federal income tax revenues… As Dave pointed out today, this [...]

I don't suppose we could

I don't suppose we could adopt a "rights-centric" approach and just let people do what they wanted with their stuff?

I know it doesn't sound all complicated and everything, but I really think that's part of it's charm.

All completed non-partisan

All completed non-partisan studies have show that Social Security will function with out remedy until sometime around 2055. These estimates assume ecomonic growth of no more than 2.5 percent. Adjustments that might then be required, could be avoided simply by repealing the, just extended , tax break for those earning more than half a million a year. People who want you to believe that Social Security (an insurance policy, annuity, not a benefit) is in imminent trouble, do so because they want to get their hands on that big pile of money. Politicians friends in brokerage companies would love to get the fees associated with managing that money. Don't be a sucker. Never accept common knowledge as truth. Remember common knowledge today, is just whatever is said by whoever gets the most TV air time. Investigate for yourself. Don't just listen to the pundits and politicos that claim to be your friends, they very well might not be.