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Greenspan Talk: Social Security can't pay up in real terms

March 3, 2005

On the Financial Sense news hour, Jim Puplava and others talk about the disaster that our social security system is in. Of particular interest is an exchange they replay between Allan Greenspan and a completely aloof Congresswoman, Carolyn Maloni. Here's a transcript:

Rep. Maloni: My question was the statement by 2042, the entire system will be bankrupt. It will not be bankrupt, I agree the trust fund will be gone, but there will still be the money coming in from the payroll taxes -- enough to pay, by all accounts, three-quarters of the benefits. Is that true or not?

Chairman Greenspan: It's true in dollar terms, but I suspect it may not be true in real terms. And the reason I'm saying that: if we cannot get full funding and the savings required to build up the capital stock in time for 2042's production of goods and services, yes, the individuals may have the cash, but the cash will not buy as much as they think it would be. The real problem has got to be real resources, and this issue of whether or not the OASI goes bankrupt or not bankrupt is an interesting legal and political question, but it really doesn't get at the economics of the retirement of individuals, the 30 million additional individuals.

Rep. Maloni: That's true, but the point is, in 2042, the entire system is not bankrupt.

As Puplava notes, she tries to slam home that point, that the system isn't bankrupt; on paper, in fictitious dollars, you can say it's not bankrupt. But in real assets, in real value, as the Chairman said, it's not there. The other point he made is that it may be conceivable that you'll get your money, but it'll only buy a cup of coffee. The surplus collected into social security, which was supposed to be set aside and invested for the time when there'd be greater demands on it, was instead spent, replaced with an empty IOU. As Puplava notes, if he did that kind of funny-business with the money his employees put in their 401k, he'd be in jail.

Another point that's worth bearing is that these IOUs aren't just empty: they're meaningless. To understand this, we have to understand that people are not entitled to social security payments; it is not like a contract where you pay into the system, and then have a legal right to get something back out later on. Rather, as Prof. Rounds notes in No More Euphemisms, social security is an umbrella term for two things: taxes and welfare. Thus, the State doesn't legally owe any of those who've paid into the SS system anything. Hence, these IOUs are nothing more than the State loaning itself money: an accounting fiction. Hence, Puplava's example isn't quite right; rather, to make it more analogous, we would have to say that he uses coercive force to make his employees give him money, with the non-binding claim that he'll pay them something back later. Thus, what is going on is even more criminal than what Puplava suggests.

Nor is social security some form of insurance. Again, under insurance, one would have a legally binding claim; under social security, the to-be recipient has no legally binding claim. He is, rather, a welfare-recipient. And there is no trust-fund. As Roth bad explains in The Social Security Swindle:

The federal government taxes the youth and adult working population, takes the money, and spends it on the boondoggles that make up the annual federal budget. Then, when the long-taxed person gets to be 65, the government taxes someone else--that is, the still-working population, to pay the so-called benefits.

...

The notion that a fund really exists rests on a "creative" accounting fiction; yes, the fund does exist on paper, but the Social Security System actually grabs the money as it comes in and purchases bonds from the Treasury, which spends the money on its usual boondoggles.

The recent talk of privatization is complete and utter humbug, and it would be an even worse disaster if the public buys it. The idealistic notions of SS-privatizers have their own problems (such as the enormous misallocation of resources, the involuntary aspect, the great likelihood that such a thing will result in much heavier intervention in and the socialization of the stock-market). However, the reality of "SS-privatization" is far worse than the fantasies of SS-privatizers.

Firstly, as Lew Rockwell explains in Save or Else, there is nothing to privatize: you can't privatize something that is a non-existent accounting fiction. If we were to talk of real privatization, it would mean eliminating the program entirely, and allowing a combination of voluntary savings, voluntary insurance, and voluntary charity to work in the free market. However, what is actually being talked about is nothing other than the creation of a forced-savings program. Prof. Sennholz provides an excellent overview of Distractions in the Social Security Debate and offers some worthwhile suggestions.

Let me close with a gem from Rep. Ron Paul, who always seems able to corner and fluster Greenspan (perhaps by reminding him what it's like to be true to one's principles):

Mr Greenspan, yesterday you were quoted as saying it was imperative that Congress restore fiscal discipline. Of course, you've made that point very often over the years. I have tried my best to vote accordingly, but sometimes I find myself in a lonely category. I have found that we have a group here that is quite willing to vote for deficits for domestic programs, then we have another group that's quite willing to spend for militarism abroad, then we have another group that likes both. So if you look around for people who are willing to cut in maybe both areas, it's pretty hard to come by. But you in the past, in answer to some of my questions, have answered that you believe that central bankers have come around to getting paper money to act in many ways like gold, therefore that there's less of an imperative for a gold standard.

I haven't yet been convinced of that. Take, for instance, the current accounts deficit. Under the gold standard, there's a lot of self-adjustments, and we certainly wouldn't have the exchange-rate distortions between the renminbi and the dollar. So I think a lot of shortcomings under the paper standard with the current account deficit. Also, the argument is made that CPI reflects that there's little or no inflation; yet, if you look at the cost of bonds, or if you look at the cost of medicine, if you look at the cost of energy, there's a lot of inflation out there. Also, if you look at the costs of houses, which are skyrocketing, which then is reflected into tax-increases, the consumer is still suffering from a lot of price-inflation that we, in Washington, are trying to deny.

PS: Regarding Greenspan's statement, it may not be true in real terms, what else could this mean but that the Fed plans on continuing the crank up the printing presses and inflate the monetary supply, the effects of which are to be compounded by fractional-reserve banking and the ever-increasing national debt?

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