Why Social Security Can’t go Bankrupt: Rerun
Reader mmcosker sends this e-mail pointing to Why Social Security Can’t go Bankrupt: Rerun at Forbe’s Magazine:
John T. Harvey’s Pragmatic Economics column at Forbes is one of the best. He is a Professor of Economics at Texas Christian University, and has a knack for breaking down politically charged “third rail” economic topics into terms that most anyone can understand. Below is just such a topic that deals with the myth that Social Security is broke – or even broken. Not entirely sure how widely read John is, as this article has 910 views.
“Why Social Security Can’t go Bankrupt: Rerun”
It is a logical impossibility for Social Security to go bankrupt. We can voluntarily choose to suspend or eliminate the program, but it could never fail because it “ran out of money.” This belief is the result of a common error: conceptualizing Social Security from the micro (individual) rather than the macro (economy-wide) perspective. It’s not a pension fund into which you put your money when you are young and from which you draw when you are old. It’s an immediate transfer from workers today to retirees today. That’s what it has always been and that’s what it has to be–there is no other possible way for it to work.
Read the full story here.
http://www.forbes.com/sites/johntharvey/2013/01/07/social-security-rerun/
mmcosker
Harvey is correct that Social Security is not broke cannot go bankrupt for the same reason the U.S. is not broke and cannot go bankrupt (despite what John Boehner lies to you).
The U.S. is Monetarily Sovereign, so has the unlimited ability to create its sovereign currency — so can pay any bill of any amount.
Social Security is a federal agency, and no federal agency can go bankrupt.
That said, Harvey is wrong about one thing. He said, ” It’s an immediate transfer from workers today to retirees today.”
This implies that FICA pays for SS benefits. It does not. FICA pays for nothing. If FICA were $0 (as it should be), Social Security could continue paying benefits forever — even double or triple benefits.
As an agency of a government having the unlimited ability to pay its bills, Social Security has the unlimited ability to pay its bills.
This is all part of the myth that federal taxes support federal spending. They do not.
Myths: The government is broke. The deficit is too high. The debt is too high. The government needs to “live within its means.” Federal finances are like personal finances.
These myths are part of the upper 1% income groups efforts to increase the gap between the rich and the rest.
well, i was going to write a post about this, but here is the spoiler
John T Harvey is essentially right.
But he is confused about one point.
It is indeed the case that Social Security depends on resources and is an immediate transfer from workers today to retirees today.
But SS depends upon the legal framework that Harvey alludes to “to make it all work in the real, complex world we live in.”
That legal framework includes the requirement that future beneficiaries pay into Social Security an amount of money directly related to the amount of benefits they will withdraw. This is what “they paid for it themselves” means. Money is how we apportion those resources. And in this respect Social Security is no different from ANY “pension fund into which you put your money when you are young and from which you draw when you are old.”
When you collect dividends it is an immediate transfer from workers today to retirees today. The “only” difference between “stocks and bonds” is the legal form of the transfer. And of course the risk.
Coberly, absolutely. Also, I don’t think John was taking issue with the “money” framework for allocating those resources. His main point is the apportioned “paper money accounting system” does not run out ever, so each person will always get what they are promised. The real risk is productivity, and anything done to destroy that would destroy social security.
Rodger, while we can never run out of printed money there are constraints. Inflation, and productivity are two. Coberly is right that you need some system of account (money) that people use to acquire the productive resources they need.
If I could put my Vulgat Marxist hat on for a second another major difference between an invested pension fund and Social Security is that the fiormer fattens its balance by maximizing the extraction of value from labor productivity (and so increases ROI on capital) where SS thrives when labor retains as large a share of its own productivity as is consistent with drawing needed capital investment. And while some would argue that any reduction in ROI automatically leads to Capital Going Galt, the real world suggests that some capitalists will stick around even at smaller margins. (Not every pizza maker wants to be Pizz-onaire like Papa John, some just want to run a nice pizzeria)
Back in 2005 Dean Baker put forth his NELB (No Economist Left Behind) Challenge that demanded that privatizers show how they could get historic ROI on equities using the economic numbers assumed for Intermediate Cost {Dean didn’t formulate it this way, blame me and not him}. And some people claim to have met the challenge, but on inspection it SS by drawing much of their return by moving production overseas and so maintaining productivity at the cost of American worker wage. Left unexplained was how this magic was supposed to work when those same workers were being called to fund their private accounts out of now decreased wages so as to share in gains of even more suppressed wages of overseas workers was left unexplained.
That is you don’t have to be a full throated advocate of Labor Theory of Value to understand that ROI on production investment depends crucially on cutting labor costs for any given productivity unit. And conversely Real Wage increases by taking a bigger share of productivity gains.
This to me explains why union pension funds heavily invested in company stock will almost always come a cropper. Managements need to maximize ROI for stockholders as a whole in practice means starving the compensation of workers depending on the pension fund. Most easily by just deferring company contributions over time and then complaining about ‘unsustainable promises’ based on ‘unfunded liability’. Social Security reduces the inclination for labor leaders and more senior vested members in the plan to buy in to “starve the new guy with two tier wages and shaft him by going from DB to DC with corporate ‘match’ (if the match ever comes). Whereas SS benefits wherever actual wage compensation increases, whether that comes at the expense of ROI or not.
SS vs pensions is not just about time shift between contribution and payout, each reacts differently to Real Wage as share of productivity. Not in linear fashion. But still