Social Security and confusion about savings

More than anything else, the unique dynamic surrounding money creates confusion in people. Whatever one thinks of Marx generally, his sociological theory of commodity fetishism seems true. In an economy driven by money and commodities, it is easy to forget the actual relationships that underlie production and consumption. For instance, people seem to think that money itself has power and is valuable, when it is actually goods and services that do. If there are no goods and services to buy, money will do you no good.

On a basic level, people understand that, especially when reminded of it. But when they think about policy and economics, they often fall into the same trap. The hysteria about Social Security insolvency — largely unfounded as it is — serves as a perfect example of the sort of confusion money and commodities create.

One often hears that the worker-to-retiree ratio is falling, which will create problems in the future. Of course, that is not the full picture. Even with the worker-to-retiree ratio falling, as long as economic growth is sufficient, no problems arise. Those who talk about worker-to-retiree ratios generally favor getting rid of Social Security in favor of private savings and investment. On its face, this may make some sense, especially when combined with talk about higher investment returns, misleading as such talk is.

It only makes sense however if one has a confusion about what money, investment, and savings actually are. On the most basic level, when you are retired, you live off the production of others. If you are not making anything, but are consuming food, water, housing, infrastructure, clothing, fuel, and so on, that necessarily means you are living off of someone else’s production. Whether you purchase those products with a Social Security check that is funded from the incomes of current workers or by winding down savings and investments, the basic reality of what is going on remains the same.

The only thing that would sink Social Security is productivity not keeping up with retirees’ needs. But if productivity does not keep up with retirees’ needs, that will sink retirees no matter what. Retirees live off of the productivity of others. Money obscures that fact, but it is true nonetheless. In the world where retirement is funded by Social Security, insufficient levels of productivity lead to lower national income, which leads to lower payroll tax revenue, which leads to Social Security insolvency. In the world where retirement is funded by cash savings and investments, insufficient levels of productivity will cause prices to rise (demand outpaces supply) and investment returns to fall (investments are just shares in future productivity).

Either situation produces an identical result for retirees, just through different mechanisms. If there is not enough economic production to provide for retirees, the only way to fix that is to reduce the retirement population or increase economic production. Changing retirement financing from Social Security to personal investment and savings wont make any practical difference. On the other hand, if there is sufficient economic production to provide for retirees, Social Security will do fine so long as the payroll taxes that fund it capture a sufficient share of production for the retired population.

As it stands, we do not seem to be facing a productivity collapse caused by a demographic decline. So Social Security is fine. But if we did face such a collapse, replacing Social Security would make no difference. Although the abstraction of money may obscure this fact for many, ultimately retired people live off the work of others, and there is no way around that.

h/t Matt Yglesias