The Social Security System of the
May 6, 2012
(This item originally appeared in Forbes.com on May 6, 2012.)
It seems to me that we are in an era where our postwar institutions,
having become outdated and often corrupt, are gradually collapsing.
This is true across our society, whether public and university
education, social security, unions, pensions, the health care
system, the financial system, big government in general, or even the
suburban pattern itself. Things that used to work no longer work.
In this regard, I am a fan of the writing of William Strauss and
Neil Howe, who predicted that all of this would happen in the middle
of the happy 1990s, when it seemed to most people that everything
would be fine and the DJIA would rise placidly to 36,000. Their book
The Fourth Turning(1997) is a good place to start.
Politically, at present, it seems to me that not much can be done.
The attempt to maintain the present institutions will overwhelm all
efforts of reform. However, it is a good time now to start to think
about what our new institutions should look like.
Unlike many libertarian types, I think the notion of Social Security
is, broadly speaking, a good thing. The countries that have tried to
do without, such as libertarian Hong Kong, have found that the
problems of old-age poverty became too serious to ignore. This is
especially true since, due to demographic changes, more and more of
the populations in most developed countries are over 65. Hong Kong
instituted its “Mandatory Provident Fund” system in 2000, which puts
a mandatory 5% contribution at both the employee and employer level
into an account that holds private-sector assets.
Similar plans are in use in India, Singapore, Malaysia, South
Africa, New Zealand, Chile and other places around the world. A 2005
study by the U.S. Social Security system itself found 31 countries,
and I think they missed a few.
The Cato Institute, in February 2012, found that a simple 50%
equity/50% bonds portfolio, begun in 1968 (not a very auspicious
time as it was the beginning of a long bear market in both stocks
and bonds), would have allowed monthly benefits of $2,067 today for
the average family, compared to $1,358 from today’s Social Security
This is all well and good, but there is another factor which I think
is more important – capital formation. Capital investment – the flip
side of savings – is what drives wealth creation, increasing incomes
and job creation in any economy. We are today saturated with the
idea that “consumption” makes an economy go, and there is some truth
to that, but mainstream economists will agree that capital
investment is a more fundamental long-term driver of economic gains.
In practice, domestic savings and domestic investment don’t line up
perfectly. There are countries, like the U.S., which use more
capital than they create. This causes a current account deficit, or
more specifically indebtedness to foreigners, which is a touchy
subject for a lot of people.
However, even when capital flows across borders relatively easily,
as is often the case today, there remains considerable “stickiness.”
In other words, countries with a high degree of domestic savings,
like China, typically also have a high degree of domestic
investment. The kind of small, entrepreneurial ventures that often
have the best return on capital are usually funded by people who are
familiar with the local situation. Foreigners like to buy government
bonds. And if savings were in excess of local investment – in other
words, if the U.S. began to run a current account surplus – that
might not be such a bad thing either.
We want to channel capital to real productive uses, not government
squandering. On the other side of every private investment is a
productive asset: your bond finances an office building, which
generates the revenue to pay the bond. Or, your stock finances a
corporation, which generates cashflow and profits. More private
investments means more productive assets, which is another way of
saying a larger, wealthier, job-creating economy.
The idea that capital creation and investment should be a primary
goal of public policy was a central economic tenet for literally
centuries. However, the notion seems lost today.
The United States today gives me the impression of an economy that
is capital starved. Net private investment by businesses averaged
5.1% of GDP in the 1960s. In the last ten years, it averaged 1.92%.
In that difference lies many reasons why job creation and wages have
been stagnant. Social Security brought in and paid out about 4.8% of
GDP last year – money which, if it were directed into private-sector
investments, instead of the present pay-as-you-go system, would
provide that much more capital for private-sector investment and