Tuesday, November 23, 2010

Why Social Security is A Very Good Thing

Private investments or retirement pools are risky because any one company, etc., can go broke.  You might think there will always be a GM, but that isn't necessarily true.

Social Security is not a ponzi scheme because it depends on only one thing financially: future workers in the USA earning taxable wages.  That is not a pool with a limited horizon, we hope.  If it ends, there's no hope for anything else either.

Only the whole country can do that.  And given that only the whole country can do that, it must, because it's by far the most efficient and acceptible way to do it.  I've had this argument with extreme conservatives who relent easier than you do because they seem to be able to think.  And you really haven't been keeping up with writings of people like Krugman, Baker, and others; your ideas have a distinctly Goldwater-era smell to them.

We hope that paid work in the future never ends, for if it does end, then everything, no matter how many layers of CDS you have wrapped around it, will fail also.  Because everything, ultimately, depends on paid work.  Even the values of land and gold would collapse.

Now there is one other risk: the political risk that the program will become unpopular, or be canceled or drastically cut despite it's popularity because of the other dimension of politics: big money.

That is precisely why SS must be funded exclusively as it is now and be seen as a social insurance program, not as welfare.  Welfare programs are trashed by those are taxed but see no benefit from them.  We have seen that happen since 1935; social security (a program that ultimately benefits the payees) has kept getting better while welfare programs (unemployment and AFDC) have been decimated or eliminated.

Though SS has a defined benefit, I personally have no problem with small adjustments.  Small adjustments over time are exactly what is required to keep a pay-as-you-go system running (as well as a non-ending pool of future workers) running forever.

Nothing else gives guaranteed numbers either.

Now back to the trust concept.  First, from where we are now it is virtually impossible, almost unimaginable to fully fund SS, unless you were thinking you could get $30T overnight by knocking over Wall Street (they don't have the money either in their smoke and mirror system with quadrillions in nominal value).  So to go from here to fully funding would require drastic cuts in benefits or drastic increase in taxes, neither to any good end.

But suppose anyway that we could scrimp and save the needed $30T (which would become $45T over time) to fully pre-fund social security.  Would that mean we would now be far better off?  Don't we need lots more "saving".  (It seems like I've heard that all my life.)

In short, no.  First you have to understand we basically have Credit Money (and I will explain subsequently why that is a very good thing).  That means that banks actually create money in the first place by lending it.  It doesn't need to be "saved" first.

Secondly you have to understand that "savings" is primarily a personal good, withholding consumption now for planned consumption later.  There may be little, if any, social benefit.  In fact, there could be great harm arising as a result of it.

Start from the assumption of a perfectly efficient market.  (I know this is not true, but it has been becoming more and more true for savers and financial investors.)  Given such a market, two things are automatically true:  (1) there is exactly enough saving in the market as it is right now, and (2) all the benefits that accrue from the act of saving return to the saver him or herself and give no advantage to the rest of society.

Now there was a time when saving returns were comparatively low compared with economic growth and inflation.  That was because when you saved or invested, your money wasn't actually used with perfect "efficiency" for you.  Instead, it built homes in your town or factories in the nearby city.  Those homes and factories brought some benefit to your neighbors as well as you.

Now we have deregulated finance, so that when you save or invest your money may go to other things, such as driving real estate bubbles, or building factories in China where labor is cheaper and workers can more easily be exploited.

This being done, there are potentially higher returns to the individual saver, but less available to society in general, and the local effect may even be negative.  That is what higher returns to savers/investors has wrought.

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