Monday, June 18, 2012

Reality Eight: It Isn’t About the Money.

Social Security Reform: Money Is the Easy Good To Produce.

At a personal level, Social Security is about money.  However, at the level of a society, it isn’t about money at all.  It’s about producing the goods and services older Americans want to consume.  To do that, we need the output older workers can generate. 

The reality is that the Social Security issue isn’t a financial issue, a budget issue, or a deficit issue.  It’s an output issue.  In “Oldest Baby Boomers Face Jobs Bust,” E. S. Browning gets awful close to the issue.  But, the focus on jobs and personal finance keep Browning from directly addressing output.

Those older Americans want to consume.  Unfortunately there are fewer and fewer young workers to generate the output for them to consume.  The sheer size of the boomer generation is highlighting the issue, but smaller families and longer life expectancies are the cause.  Neither of those will change quickly.  As currently constituted, Social Security has been made obsolete by the demographic trends toward smaller families and longer lives.
The article notes, “The problem of older, out-of-work Americans extends beyond individuals to the U.S. economy. Among jobless people aged 55 to 64 who want to work, lost annual wages exceed an estimated $100 billion, based on the median income of this age group….Retirement savings losses exceed $10 billion a year, assuming contribution rates of 8% for employees and 2% for employers. Even if only half the people were working, the economy would gain $50 billion a year in income and another $5 billion in retirement savings.”

The key phrase is, “the economy would gain $50 billion a year in income.”  The exact number is irrelevant.  Income is either real or nominal.  It’s either output or inflation.  Here the writer is acknowledging the fact that employment and savings generate output and income.  Unfortunately, he or she doesn’t seem to fully recognize the significance of the relationship.  At another point the article loses its way.   It’s as if the author went bonkers.  The article states, “The trouble spreads across generations. Older people hang on to jobs…. they displace younger workers.” 

Suddenly it’s a zero sum game where the number of jobs is fixed. What happened to the income the older workers generate and the consumption it implies?  Wouldn’t that create more demand which would generate more jobs to satisfy the demand which would generate more income?  Where’s the consumption multiplier?  People working has never been responsible for other people being unemployed.  It just doesn’t work that way. One needs to remember that the same displacement nonsense cropped up in connection with women working and equality of employment opportunities for other minorities as far back as the first waves of immigrants.  It’s nonsense. 
What is particularly odd about much of the discussion of Social Security is that it ignores the output post- 65 year olds can and do generate.  Browning focuses on 55 to 64 year olds. He or she isn’t alone in ignoring the income that post-65 year olds could and often do generate.   In a curious twist to logic, we’ve set up Social Security in a way that penalizes the very workers that would contribute the most to income and output, and who would thereby make the largest contribution to the viability of the program.

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