The Social Security Debate
With so much information and diatribe going back and forth on social security, it's difficult to know what ground truth is. Is the social security system truly in danger of going bankrupt? Are there no alternatives to personal savings accounts? Is action really needed immediately? I have found that, even on complicated subjects, it pays to take a look at the underlying assumptions. Even when I was working on relatively complex engineering problems, that complexity being relative to my total lack of engineering background, I discovered that the underlying assumptions are often based upon plain common sense, or a lack thereof. So what are the underlying assumptions of the social security dilemma?
One of the underlying assumptions made by those that say the system is in dire straights is that the economy will only grow at a rate of 1.4% per year. As the average growth over the last 75years has exceeded that rate by more than two times, it is safe to say that this assumption is less than credible. Another assumption made, by virtue of the fact that it is not included in the pessimistic projections, is that productivity will not increase. As productivity increases of 1% per year would substantially alter the projected ability of the system to continue paying benefits without raising taxes due to income to the system being greater than payouts, this is a significant omission as well. Another omission is the discount of the impact of immigration on the workforce to offset the number of workers paying into the system. Another assumption is that government interference in the private economy to provide for the public good is always bad. If we are going to have a reasonable debate about social security, you would think that we could also include reasonable assumptions.
Assumptions notwithstanding, there is a larger common sense problem in terms of personal savings accounts that has escaped debate in relation to the difference between the real economy and the speculative economy, the latter being that which we are being encouraged to trust our social security to. Regardless of how much the speculative economy inflates, there are only so many goods and services which the real economy generates. What this means is that the 8% or so earnings which people are expecting to realize from the speculative economy, due to current returns, must be realized from a real economy that is only growing at a fraction of that rate. You can only buy what the real economy produces. The practical result of this is that, although many in the baby boom cohort may reap a growth greater than the real economy is producing, that must be offset by many reaping returns at a much reduced rate. The fact is, social security is not an investment, rather it is social insurance. It was never meant to be a competitive investment strategy, but is rather a commitment of the people to ensure that each member of society is provided with the means to acquire the necessities of life. To trust this to the speculative economy, if it is something worth doing, is foolish. The real question, then, is this: do we mutually agree that we ought to ensure a minimum standard of living to each American? If we answer this in the affirmative, then we need to look for other alternatives besides personal savings accounts in the speculative economy. Engaging in the debate with more reasonable assumptions would be a good start.