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Wednesday, August 1, 1990

The Social Security Trust Fund: Savings vs. Saving

Mr. Fulmer is a systems specialist in Houston.

For every person receiving Social Security benefits in 1950, 17 others were employed. By 1970 the ratio had dropped to three workers per beneficiary, and as postwar baby boomers reach retirement age early in the 21st century? that ratio will drop to two-to-one. In the year 2030, workers will be paying an estimated one-third of their wages to support Social Security recipients.

Originally the program was intended to be pay-as-you-go, with receipts equaling disbursements. With insolvency looming, however, Congress in 1977 and 1983 decided to increase tax revenues beyond current expenditures and “save” the difference for future needs through the purchase of government securities. In practice, however, the purchase money is spent on current programs, and the “Trust Fund” is left with IOUs—thus Social Security tax receipts aren’t “saved” in any meaningful sense.

Proponents of the “Trust Fund” scheme argue that the government is simply investing in Treasury notes in the same way that a private citizen might, and, like the citizen, can expect a return on the principal when the notes are redeemed. But how is this “return” to be generated? The money isn’t being used to produce wealth, but rather is spent on current consumption. Investors must bank on the government’s future ability to sell more notes(i.e., to keep the pyramid growing) or, failing that, to collect more taxes.

If taxes are used to buy back the IOUs, then we are left with the original problem: workers are still footing the bill. The only difference is that now the total is split between F.I.C.A. and the general tax fund. Actually, the workers would get some relief since corporations and Social Security recipients must also pay into the general fund, but the benefits of corporate participation would be offset by resulting price increases, reduced capital investment, lower wages, and higher unemployment.

In any case, the same amount of “relief” could have been realized by simply declaring that Social Security would be supplemented directly by general revenues rather than by shoveling those revenues in through a back door. The big difference, of course, would be that then the politicians wouldn’t get to spend the money from the “savings fund.”

Real Saving

Saving must be more than the mere husbandry of paper dollars. Ultimately there must be something for those dollars to purchase—production must precede consumption. True saving is an increase in real wealth, not dollars. As Adam Smith pointed out, increased wealth can result only from greater production which, in turn, can be achieved only by raising the number of productive laborers or by improving the efficiency of laborers already employed. This cannot occur without additional capital investment. Capital is required for the maintenance of new workers or for the development of better methods or machinery.

An increase in the nation’s productivity leads to a larger tax base from which tax revenues may be drawn• Therefore, the best long-term investment any government can make is to allow the private sector to retain its capital so that production can grow.

If, instead, the government takes more money from the market than it currently needs so as to form a “savings fund,” it erodes its own tax base. In the end, the creation of such a fund reduces future tax income, and wealth isn’t saved but lost.

The Smoke Screen of Consumption

Keynesians counter that such government action doesn’t reduce production or productive capacity since the money taxed away from the private sector remains in circulation. Ultimately government expenditures wind up in the hands of consumers—government employees, contractors, members of the armed forces, and beneficiaries of Federal programs—who purchase goods through the market. This increased consumption, it is argued, raises demand for products and spurs industry to ever greater production.

In reality, however, consumption isn’t increased by government spending; it is only transferred from some individuals to others. And this transfer reduces productive output. As Adam Smith explained in The Wealth of Nations. “The whole, or almost the whole public revenue, is in most countries employed in maintaining unproductive hands . . . . Such people, as they themselves produce nothing, are all maintained by the produce of other men’s labor• When multiplied, therefore, to an unnecessary number, they may • . . consume so great a share of this produce, as not to leave sufficiency for maintaining the productive laborers . . . .” (Random House, 1937, p. 325)

Now What?

First we must admit that there are no funds in the “Trust Fund.” The money has been commingled with other Federal revenues and spent. (The federal government runs multi-billion-dollar deficits, which include Social Security receipts and disbursements, so it can’t have net savings.) Social Security hasn’t been made “solvent”; it remains the same bankrupt pyramid scheme it has been all along. The problem has only been compounded by creating yet another pyramid scheme with which to finance the first.

Next we have to identify our real goal. It is not to salvage a particular program, nor is it to pile up mountains of paper money. The goal is to create sufficient real wealth to support people in their old age. Stated this way, it becomes clear that the issue is one of increasing production.

This can best be done by ending Social Security and allowing people to provide for their own retirements by investing their own money in real, productive capital through private banks, pension plans, and corporate stocks and bonds• Only through such private investment can we provide the capital to expand our industrial base.

In less than 150 years, the free market increased productivity so much that child labor could be stopped. Individuals, who previously had to work all their waking hours to earn a bare existence, now can support an entire family with only 40 hours of labor a week. The elderly, who had had to work until their deaths (or, in some pre-industrial societies, were left to die when their usefulness ended), can now look forward to retirement.

There is no reason why in the computer age the free market cannot continue this spectacular progress begun in the machine age. The market can provide the elderly with the material goods they need, but only if it is allowed to work. Only through real saving—producing more than we consume—n we provide for the future. We cannot do it by amassing paper dollars and Treasury notes.

  • Richard Fulmer is a freelance writer from Humble, Texas, and the winner of the third annual Beth A. Hoffman Memorial Prize for Economic Writing for his article "Cavemen and Middlemen," from the April 2012 Freeman