op-ed by reader coberly
A MODEST NOTE on the use of Present Value in Social Security propaganda
I should begin by saying that I have nothing against the use of
present value (PV) calculations being used to make honest comparisons
between various options across time. What I am concerned with here
is that they can be used to mislead the unwary.
The present value of 10 dollars 100 years from now at 3% real
interest is 52 cents. There are a number of traps in even this
simple statement, but the one I want to deal with today is this:
I can buy dinner today at a cheap restaurant for 10 dollars. Does
that 52 cent present value mean I can go into a restaurant a hundred
years from today and buy dinner for 52 cents? Of course not. What
present value says is that if I take 52 cents today and invest it and
get 3% over the rate of inflation for a hundred years I will have 10
dollars and can buy dinner with it then.
Well, that’s nice. But this is not the way we usually budget our
More to the point, when they tell you that the PV of your taxes, paid
today, is more than the PV of the benefits you will receive in 40
years… or that the PV of benefits a hundred years from now is less
than the PV of benefits paid yesterday… they are relying on this
optical illusion to make you think some great big huge horrible
injustice or inequity is being committed.
The present value of that ten dollars a hundred years from now may be
52 cents, but in a hundred years it will still cost 10 dollars for
that dinner… remember these are real dollars, we have discounted
It would be nice if we could all set aside 52 cents today and not
have to worry about finding enough for dinner in a hundred years.
But we can’t. In the first place, we have to buy dinner today… for
all the family, including granny over there in the corner. Forgotten
but not dead.
In the second place, NO one can guarantee anything for the next 100
years, much less an interest rate 3% above the rate of inflation.
That’s why Social Security is pay-as-you-go. Just like our daily bread.
by reader coberly