We’re Thinking About Social Security the Wrong Way

Today there were several articles warning about Social Security’s inevitable insolvency. While at first glance the “trust fund” appears to be approaching a crisis, I believe we are thinking about this the wrong way.

The truth is there is no trust fund. Social Security does not collect payroll taxes and invest it. The program’s assets, liabilities, surpluses, and deficits are an accounting fiction.

Social Security “invests” payroll tax contributions in U.S. government bonds. Essentially they are used to finance government spending. The famous Clinton-era surplus was mostly driven by Social Security taxes exceeding expenses.

Because Social Security is a government agency that lends its surplus tax intake to the Federal Government (by buying government bonds), we should view its tax receipts like any other tax and its expenses like any other expense. It is just another federal agency.

To support this point, we can consider alternatives to the current system:

  • Privatization: What if we sold the bonds in the “trust fund” and gave people the cash to invest themselves? This would inject an enormous amount of new money into the economy and would drive substantial asset inflation. When Social Security taxes are used to buy government bonds, the money is removed from circulation. Privatization would reintroduce all that money to the markets at once and would be similar to giving every person in America $X to invest without an offsetting tax.
  • Privatization with Government Bonds Only: What if we gave people the money but only allowed them to invest in government bonds? Retirees would still depend on the Federal Government to pay interest and repay principal for their retirement income, bringing us back to square 1.
  • National Pension Fund: With ~$1.5 trillion, Japan’s national pension fund is the largest collection of retirement savings in the world. The fund invests in many categories of assets globally. What if America adopted a similar system? Immediately we face the same issue as “Privatization” above, which is that such a change would introduce enormous amounts of new money into the economy. Additionally, the Federal Government taking ownership stakes in different companies by buying their shares is a partial nationalization of private industry. Not only would this be a major wealth transfer to rich investors who own the assets being purchased, but it would also be socialistic in that the government would begin to partially own the means of production.

So where does this leave us? Well, I would argue the current system is not that bad. Rather than a “trust fund,” we should think of Social Security as a promise that we will take care of the elderly in the present, with the understanding that our children will take care of us. Younger people today are somewhat unlucky in that we will need to support the very large Baby Boomer generation, which is a heavier burden than they had to bear (in 1970 there were ~5.4 working age people per person >65; today it is estimated at ~3.8 and in 2030 it is estimated to be 2.8). Every generation has to deal with unique challenges though (war, economic turmoil, disease, etc.). The Baby Boomers had their fair share and we should not feel too sorry for ourselves.

A related point to consider is that, in general, society as a whole cannot “save” for the future in a monetary sense. Even if we accumulate trillions of dollars in the “trust fund”, it will not matter if our economy cannot provide the doctors, homes, food, caregivers, etc. that the future’s elderly will need. This is part of a broader point that people are far too focused on the government’s finances and not nearly concerned enough with real resources. Indeed we may need to run budget deficits today to train doctors to care for retirees in the future.

  • Consider if the government ran annual surpluses and built up an enormous cash pile but everyone stopped having children. No matter how much money the government or even individuals save, they still depend on society to be able to exchange their currency (or even gold or crypto for those who think they are “outside the system”) into the goods and services they need.
  • One caveat to the “society cannot save” concept is that Social Security taxes do limit consumption by the people paying them, thus potentially freeing resources for the elderly in the present or preserving longer-term/one-time consumable resources for future generations. 
  • For example, if there were no payroll taxes, a young, working couple might use the excess funds to hire someone to clean their apartment regularly. By imposing the payroll tax, we transfer that purchasing power from the working couple to a retiree who might use it to hire someone to provide occasional in-home care. Multiply this by millions of people and there is a lot more elderly care and a lot less home cleaning. Over the long-term and in the aggregate, the market will attract more people into retiree care than home cleaning because we redistributed the economic incentives.

If Social Security is one big accounting gimmick, why do we have it in the first place? I believe the idea that workers are saving their own money with the government and they are simply getting their own money back when they retire was more palatable to redistribution-skeptical Americans in the 1930s (and indeed today) than the fact that we are ultimately dependent on each other.

Today both sides of the political spectrum use “insolvency” scaremongering to achieve their political aims. Democrats advocate for higher payroll taxes while Republicans push for benefit cuts (at least before Trump). Both of these policies may be appropriate in certain circumstances, but these decisions should be viewed in the context of the larger federal budget (or ideally in the context of our real national resources), rather than as a standalone program that can “run out of money.” 

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