Warren Moslers 7 Seven Deadly Frauds of Economic Policy #4

Deadly Innocent Fraud #4:
Social Security (Government Pension Funds for the elderly) is broken. There isn’t enough money to support it.
Fact:
Government Checks Don’t Bounce.

At first sight this looks like Warren Mosler is saying there is no problem with the US Social Security system.  Whatever money is needed  can just be created and spent . And that’s true it can. But that doesn’t mean there aren’t fundamental problems.

There is a debate in the US over the privatisation of social security.  It is known as superannuation,  in its privatised version,  in Australia and is a multi billion dollar industry.There are similar debates in the UK and elsewhere, and so a discussion of the issues arising is still relevant, even in a non-US context.  The political right don’t like the idea of government involvement in anything other than military and police actions of various forms,  and the very words ‘social’ and ‘security’ would sound far too Marxist for their liking.

WM makes the point that social security is essentially the process of paying money to the Government now and getting it back with interest later. That’s exactly the same as buying a Government bond. Government bonds have been bought and sold for over 200 years and no one has ever  argued against those before, on the grounds of some hidden socialist agenda!

With superannuation we buy other securities too like stocks or even ‘invest’ in works of art. It should be noted that the process of buying a stock, or a share, in an industrial company only gives that company extra working capital when the stocks are first issued. After that they just change hands at a market price. The seller may well use the raised funds to buy another stock or they  may buy a government security like a bond. Sooner or later all money invested in shares is going to end up back in government securities and so there isn’t any net saving by government.

Privatisation may work out slightly better for some individuals and worse for others.  Given the extra complexity and the extra administration costs of superannuation,  it must have a real cost in terms of use of available resources, and so probably is a slightly worse option IMO. But it is not the main issue.

The real problem, as pointed out by WM, isn’t about lack of  money in the government’s kitty now,  it’s what money will buy when it comes to be paid out, either as superannuation, or government pensions.

He gives the somewhat unrealistic scenario:
50 years from now when there is one person left working and 300 million retired people (I exaggerate to make the point), that guy is going to be pretty busy since he’ll have to grow all the food, build and maintain all the buildings, do the laundry, take care of all medical needs, produce the TV shows, etc. etc. etc. What we need to do is make sure that those 300 million retired people have the funds to pay him??? I don’t think so! This problem obviously isn’t about money. What we need to do is make sure that the one guy working is smart enough and productive enough and has enough capital goods and software to be able to get it all done, or else those retirees are in serious trouble, no matter how much money they might have”

I am somewhat  in disagreement with WM here.  I’d just ask the question of why this one guy, even if he were given all the resources to get the job done, would actually want to work flat out supporting all these extra old folk?   He could reduce  his workload by a factor of hundred by letting at least 99% of the retirees die and still have plenty of customers for his services.

In fact he probably would get along just fine without any elderly customers at all if we just change the numbers to be 100 in the workforce.  Those other 99 people are going to be much wealthier than the elderly retirees, given they too will have a huge customer base,  so they will be the sort of customers any business person would like to have. Those retirees are going to be in serious trouble, money or no money,  if there just aren’t enough younger people around to look after them!

The question is whether pensioners can be supported as the demographics change and increasing numbers of elderly retirees can be supported by a shrinking workforce .

The current problem is largely one of economic mismanagement creating  a waste of resources.  The future problem will be lack of resources and that is going to be much harder to solve than the present one.

The 7 Deadly Innocent Frauds of Economic Policy: by Warren Mosler is available on pdf for anyone who would like the full explanation to each one.

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