By Tracy Marvin
Videos produced by Eric Tymoigne’s student in his Eric Tymgoine’s modern money course.
In short, it serves no useful purpose to project financial shortfalls for Social Security and Medicare into a far distant future, and no purpose whatever to revise those programs today on the basis of such projections.
We summarize the reasons:
First, Social Security spending need not be politically constrained by tax receipts from any particular source.
.....whether we are setting fuel taxes or payroll taxes, the tax rate should be administered in such a manner that it achieves the public interest, not with a view to matching spending in any particular federal program. Likewise, hen deciding how much to spend on transportation or Social Security, the program budget should be set to achieve the public purpose, rather than constraining spending to projected receipts from a specific tax.....
Second, so far as fiscal impacts on the economy go, what matters is the overall fiscal stance of the government, not the stance attributed to one part of the budget.
Third, the most important factors determining future real burdens are demographic and technological, not financial. Uncertainties about demographic and technological trends increase exponentially as the length of the projection period increases. Almost any projection of birth rates, family size, death rates, or labor productivity for 2085 would be equally plausible,and very slight changes to trend rates for any of these variables would make huge differences for projections of real burdens. For this reason, basing policy today on such projections is almost certainly swinging in the dark.
Fourth, if we do face problems in the distant future due to aging of the population, they are not financial problems. The federal government will always be able to make all benefit payments as they come due; the only question is whether the payments correspond to an appropriate share of total product at that time.
To conclude, pension funds are so large that they will bubble-up any financial market they are allowed to enter—and what goes up must come down. The problem really is that what Hyman Minsky called managed money (including pension funds, sovereign wealth funds, university endowments, money market funds, etc), taken as a whole, is simply too large to be supported by the nation's ability to produce output and income necessary to provide a foundation for the financial assets and debts that exist.
What we now need to realize is that the Social Security leg of our retirement stool will play the biggest role for most of tomorrow's seniors. Effectively what Social Security will do is to tax tomorrow's workers so that they cannot consume all of tomorrow's output. And it will pay benefits to tomorrow's seniors so that they can buy some of tomorrow's output. Exactly how that division of tomorrow's output will be made is a decision that must be made by tomorrow's voters. All that we can do today is to try to keep our economy strong, educate our young people so that they will be productive tomorrow, and improve our longest-lived public infrastructure.