Get Ready For Some Totally Confused Social Security Discussions

With the shutdown and debt ceiling theater behind us, the discussion appears to be pivoting towards Social Security and Medicare. Fix the Debt is leading the charge, along with the support of other strange characters, to cut these programs. To its great credit, the AFL-CIO has said in no uncertain terms that it will not provide support to anyone who does so.

As the AFL-CIO policy director points out in the above link, this debate tends to be infected with a great deal of misrepresentations, e.g. that program bankruptcies are imminent. The fiscal reality for these old-age programs is actually pretty simple. Social Security is projected to have a shortfall a couple of decades from now. Across the 75 year horizon, that shortfall is equal to 1 percent of GDP. This is pretty modest, and could be closed by uncapping the payroll tax or bumping it slightly or both. Medicare is projected to get really out of control, but that’s because all health care costs are projected to get really out of control. You fix Medicare by fixing health care costs. If you can’t fix the projected health care cost explosion, everything is going to be pretty horrible no matter what you do to Medicare.

Sadly, the confusion in this debate isn’t just around the numbers. The whole discussion is extremely confused about how to even understand what old-age security programs actually are. Because people hate to think they are receiving welfare handouts, we’ve all decided to pretend that Social Security is some kind of savings program. That way it can really be about you paying in and getting out. Hooray personal responsibility and individualism! But in reality, Social Security is really just a straightforward welfare handout. You tax the currently-working and then take the revenue and give it to the currently-old. It is a transfer program or, if you’d like, a “redistribution” program.

This aspect of old-age security programs is completely unavoidable. As I wrote earlier this year, if you can get currency out of your head for a moment, you should be able to see that — in real resource and real production terms — all retired people live off the production of the currently-working. This is vacuously and stupidly true. Retired people don’t produce anything. So where is the stuff they are consuming coming from? That’s right: the currently-working.

In non-money terms, our ability to support retired people is a function of how much stuff the currently-working are producing. It has nothing to do with how much money is in the Social Security Trust Fund. It has nothing to do with how much payroll tax the people who are moving into retirement paid over the last few decades. That’s all meaningless outside of the world of accounting.

For instance, suppose we had jacked payroll taxes 30 years ago such that the Social Security Trust Fund was much bigger at the present moment than it actually is. Would that change anything outside of the accounting world? No. Recall once again: the iron rule here is that the currently-retired are necessarily living solely off the production of the currently-working. Piling up a bunch of cash and then disgorging doesn’t change the mechanics of what is going on. The currently-retired would still be snatching up the exact same fraction of the currently-working’s production for their consumption. The real outcome would be exactly the same in this more “fiscally responsible” scenario.

In fact, we can even approximate how this would mechanically work out in terms of accounts (though it’s not necessary). If the Social Security Trust Fund had accumulated a bigger stash from the generation that’s getting ready to retire, they would have taken that extra revenue and purchased special-issue Treasury bonds. That’s what they do with the money in the Trust Fund. This involves handing the money to the Treasury and getting a bond in return. Later, when it was time to disgorge this extra stash of bonds in order to pay off the SS benefits of the Boomers, the Treasury would have to pay (one way or another) the amount of the bond. Where would it get the money to do that? From tax revenues. Who will be paying those tax revenues? That’s right: the currently-working at that time.

You can play this game out an infinite number of ways, but you’ll never escape the brute fact that the currently-retired necessarily live off of the currently-working. No amount of messing around with prior saving schemes or higher payroll taxes would have ever been able to avoid this fact. For benefits to remain constant, the same amount of welfare handout transfers from the currently-working to the currently-retired would have to take place no matter what.

The point here is that the talk of money and accounts massively obscures this whole debate. The idea, for instance, that the retired will somehow “spend all the money” and then the currently-young will have no Social Security is just painfully stupid. The ability of the currently-young to have Social Security is entirely dependent upon what the generation that comes after them is like. It is this subsequent generation (and their production) that the currently-young will be living off of in their retirement, not the Boomers or whatever is in the Social Security Trust Fund.

So yes, due to population dynamics, supporting the soon-to-be-retired out of the product of the currently-working will require more consumption transfers per current worker. That is not a function of fiscal irresponsibility. It’s a function of how reality works and there is literally nothing you could have ever done to avoid it. The debate should turn then, not on some garbage talk about money and accounts, but on how much of the national product you think retired people should receive. It is a debate about how to allocate present consumption among the currently-working and the currently-retired. But that’s not the debate anyone will have because the existence of money destroys people’s minds and their ability to think about macro issues like this clearly.