Social Security is a red herring.

How the dismal science applies to your life.
Feb. 18 2005 11:11 AM

Save and Save and Then Save Some More

Social Security is a red herring. Here's our real long-term problem.

Is Social Security headed for bankruptcy? Sure.

Should we care? Not a bit.

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Here's why: We pay lots of taxes. Some of those taxes are called "Social Security taxes." We get lots of government benefits. Some of those benefits are called "Social Security benefits." Bankruptcy means that in 10 to 15 years, Social Security benefits will exceed Social Security taxes.

The looming bankruptcy is both absolutely real and absolutely insignificant. You could reverse it in an instant by changing a definition or two. Keep benefits exactly as they are, but call only half of them "Social Security benefits"; call the rest something else, like, say, "Geezer Pleasers." Social Security taxes would exceed "Social Security benefits." Voilà, no more bankruptcy.

The true crisis lies elsewhere. It has nothing to do with bankruptcy, nothing to do with definitions or accounting tricks, nothing to do with lockboxes or anything else about the way the system is structured. Instead, the crisis is completely defined by the fact that in the future (as in the present) there will be only a finite number of goods to go around, and in the future (unlike in the present) there will be a lot more old people clamoring for a share.

When it comes to issues like this, I always tell my students, "Don't follow the money; follow the goods." In 2020, there will be a certain amount of food, a certain amount of aspirin, a certain number of television sets. All that matters is who gets how much. And you can't change that with accounting tricks.

Now (and I am indebted to my colleague Alan Stockman for driving this point forcefully home), there is probably very little we can do right now in terms of deciding who gets what in the year 2020. That's because any decisions we make are subject to reversal through the political process. In 2020, old people either will or will not have the political clout to claim a bigger share of the pie. If they have that clout, they'll use it, and if not, not. And they won't be bound by anything we decided to do back in 2005.

Therefore the only thing we can do today to alleviate the future crisis is try to ensure that there will be more goods available in the future. OK, what determines the future availability of goods? Three things: the amount of work young people do in the future, the amount of work old people do in the future, and the quality and quantity of the stuff (machines, factories, raw materials, etc.) that we leave for them to work with.

There's not much we can do about dictating the work habits of people in 2020. They'll choose their own work habits, and they'll pass their own laws to try to influence each others' work habits. That means the only thing we can do now to address the underlying crisis is to encourage saving, because saving means investment, and investment means that when 2020 comes around we and our descendants will have more and better machines and factories to produce more and better food and aspirin and television sets.

In other words: If you want to address the Social Security crisis of the future, you must adopt laws that encourage saving in the present. There's nothing else you can do.