Saving Social Security

To save Social Security, it would have to be transformed from a transfer payment system to a real-saving system. The outlook for the U.S. Social Security system is poor. Benefit schedules that would make the system solvent would probably require politicians to give up power they are unwilling to give up and require workers to contribute more of their future production than they are willing to contribute. This article shows why the Social Security system probably cannot be saved, explains why most of the discussion about saving it misses the mark, and provides workers and retirees the insight needed to evaluate legislative proposals and prepare for the consequences.The goods Social Security recipients consume could come from real savings or from transfer payments. Real savings are like something stashed away, as opposed to government debt. Transfer payments take from one person to give to another, which is the system operated by Social Security. The trust fund, a portfolio of government debt, is irrelevant to solvency. The issue of Social Security solvency is whether an expropriation schedule to pay retirees what they have been promised will be honored by future workers.The various schemes put forth by politicians to “solve” the Social Security problem will not work; they simply provide cover for increased government spending and higher taxes.For the country as a whole, investing in government debt is not useful because the proceeds tend not to be used to create physical capital (or store consumption goods). Investing in privately issued securities does lead to the creation of productive capacity, so investing the Social Security trust fund in privately issued securities is a step in the right direction. Unfortunately, it cannot help much if benefits are still funded with transfer payments. The fundamental problem remains whether future workers will honor the expropriation schedule.The issue of what kind of private securities should be held is often misunderstood. A common argument is that stocks would be preferable to bonds because they have higher long-term returns, but long-term returns are not the issue. Solvency depends only on whether the current value of assets exceeds the present value of liabilities. And a dollar's worth of stocks has the same value as a dollar's worth of assets in any other form.Help for the Social Security system could come in the form of transformation into a system based on real savings set up like a private defined-contribution plan with individual, actuarially sound accounts. Such a system would remove any incentive for workers to complain about excessive retiree benefits and would have no possibility of insolvency. Transfer payments would be used only to guarantee that all retirees would receive adequate retirement income. The required level of transfer payments would be far smaller than in the current Social Security system.Implementation of this kind of Social Security system would require current workers to save for themselves in addition to enduring continued expropriation of their production to support existing retirees. Probably the only way workers would accept such a situation is if reduced government spending in other areas were used to assure that the workers' own consumption did not suffer. Unfortunately, such reduced spending is unlikely, because in our political climate, spending confers political power.