Economic Issues

Social Security Cannot Go Broke!

It is impossible for Social Security to go broke. But let’s come back to that.

Suppose you work at the local Metro Transit Authority. There’s a subway, and you sell fare cards. Riders obtain the cards, and purchase ride passes which are loaded onto their cards. When they purchase a pass, you credit (increase) their account data that’s stored on the card. When they come to ride the train, you debit (decrease) their account, redeeming the ride pass.

Where do the credits “come from”? Is it possible for the Metro to “run out” of them? Does the Metro have to redeem passes from people before it can sell new passes to other people? Do the passes it redeems from some people in any sense “pay for” the passes it credits to other people? If the Metro gives out more passes than it redeems back, is it somehow in financial danger of “going bankrupt” and not being able to sell more passes? 

Clearly, the credits don’t “come from” anywhere. Metro cannot “run out” of passes to sell. It doesn’t have to redeem passes from some people before it is able to sell passes to other people, and the passes it does redeem do not in any sense “pay for” the passes it sells. Selling more passes than it collects back can’t possibly bankrupt the Metro, because it can’t run out of passes.

This should be foolishly obvious to you; these are practically nonsense questions, they are so trivial; yet, why can we not wrap our heads around the simple fact that our modern monetary system works in exactly the same way? Citizens obtain bank accounts. They can obtain dollars in their accounts by purchasing them (using their wares or labor) from the government. The government, as the sole issuer of the dollar, spends by crediting bank accounts. The dollars don’t “come from” anywhere. The government cannot “run out” of dollars. It doesn’t need to collect taxes from people before it is able to spend, and the taxes do not in any sense “pay for” the spending. And spending more dollars than it takes back in (aka, a deficit) cannot make the government “go bankrupt”, because it can’t run out of dollars. 

But back to your Metro job. Suppose that your company cared deeply for your veteran retirees, and instituted a pension benefit: after retirement, each former employee would receive a free 20 subway passes per month, in recognition of a lifetime of service. Isn’t it heartwarming that society would choose to honor their elders this way? Especially since there’s a big group of workers scheduled to retire in about 10 years.

But wait! It turns out the Metro has its own Congress. And the Congress-people aren’t happy. “20 passes per month? What are you crazy?? How will we ever afford it??? This will bankrupt us! We already give out more passes than we take in, this is unsustainable!! We need to balance the pass budget, in fact run a surplus, so that we can save passes now so that we have enough in 10 years!!! Otherwise we’re not going to run out of passes and won’t be able to meet our unfunded pass liability!!!!” 

Huh????!?

Good thing you realize how absurd that sounds. In fact, if you’re paying attention, you might realize something else too: coming up with the passes can’t possibly be a problem for the Metro... but coming up with the subway rides might be! If there aren’t enough trains, train conductors, track maintenance workers, electrical power stations, security guards, fare gates, and parking spaces at the stations in 10 years when the big group retires, then Metro won’t be able to meet all the demand for rides that it will have at that time when it starts handing out the extra passes. In fact, if capacity gets scarce enough, and competition for the few available seats and open handrails gets fierce enough, then the price will get bid up as people fight to get their share during the shortage, and there’ll be “pass inflation.” 

You try to tell this to the Metro Congress, but sadly they don’t listen. “We need a balanced budget, so that we live within our means and don’t run out of passes!” they exclaim, cluelessly.

Sadly, this seems to be the state of affairs in the dollar-world too. The balanced-budget-screamers seem convinced that we’re in danger of running out of Social Security money, when in reality that isn’t the problem at all. The TRUE crisis with Social Security isn’t a dollar-shortage, it’s a stuff-shortage: will we be producing enough stuff to supply all the things our retirees will want to buy? All the homes, cars, food, clothes, beds, blankets, furniture, electronics, etc. Will we have the productive capacity, the factories and workers and equipment, to meet all of that demand? Because if not, then prices will get bid up in the competition between buyers in the shortage, and there’ll be inflation. 

Luckily, there is a reason for hope in this story, because the real world has an advantage over the Metro world. In the real world, people are actually willing to do work in exchange for dollars. Think about that: that’s as if the Metro were able to pay people using subway passes in exchange for them working. If Metro could do that, then it would be easy for them to hire everybody who was around who was willing to work, and employ them to build up rail capacity to deal with the impending retiree crisis. We can do that! The government could use its dollars to pay people to work, and employ them to build up our productive capacity for a time in 10 years when the labor force will be a lot smaller and the retired population a lot larger. Then we can avert the stuff-shortage catastrophe.

But will we? Perhaps even worse than our potential stuff-crisis is our actual crises of fear. If we let old myths about the government running out of money (which might have had some truth during the gold standard but are inapplicable today) scare us into doing something irrational like trying to raise taxes or cut spending now to “pay for” retirement benefits in the future, then we actually make the crisis worse by reducing real physical investment at a time when we should be increasing it. Also, the partisan screaming match sure isn’t helping either. When we should be coming together to mobilize all of our resources towards solving the problem at hand, instead we’ve paralyzed ourselves into inaction.

This author remains optimistic. The US is the same country that came together to win WW2 and put a man on the moon. Surely we can overcome the squabbling and provide homes and blankets to our seniors without breaking the backs of our children. This begins by understanding which crises are real and which ones are imaginary.

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