Tuesday, October 21, 2014

Why Social Security Can't Go Bankrupt: Rerun --- from forbes.com

It is a logical impossibility for Social Security to go bankrupt. We can voluntarily choose to suspend or eliminate the program, but it could never fail because it “ran out of money.” This belief is the result of a common error: conceptualizing Social Security from the micro (individual) rather than the macro (economy-wide) perspective. It’s not a pension fund into which you put your money when you are young and from which you draw when you are old. It’s an immediate transfer from workers today to retirees today. That’s what it has always been and that’s what it has to be–there is no other possible way for it to work.
To explain this, let’s create a simple world. Say there has been some sort of terrible global calamity and we only have ten people left. Further say that these ten decide to make the best of it and set up a society, including an economy. Of course, much of humanity’s technology is now lost to us, so our level of productivity is very low. As a starting point, assume that each of us is only able to produce enough output for herself or himself to survive.
How many people can retire under these circumstances? Obviously, none. Anyone who stops working, starves. It is irrelevant how many people over 65, disabled, or otherwise deserving there are, no one can quit because our level of productivity is too low. Nor is it helpful to have a pile of cash somewhere. No amount of money can change the fact that one person can only make enough goods and services for one person. If there are ten people to feed, clothe, and shelter, then ten people must work. This reality is inescapable and is the reason why the real determinant of the feasibility of Social Security (or any other type of retirement system, private or public) is productivity. If it falls short, then supporting a class of retirees is impossible, regardless of how much cash we have on hand; if it does not, however, financing it is trivial. This will be shown below. Read More... Why Social Security Can't Go Bankrupt: Rerun
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