Social Security comments by Mark G.
Social Security is government spending. A Social Security check looks like any other government check; all of which come from the US Treasury. Really no different than defense spending, etc.
The point of confusion is the separate tax (FICA) and the "trust fund". In reality it doesn't matter where the money comes from to pay the benefits. Social Security can therefore never be insolvent or bankrupt. To say so would imply the US treasury is bankrupt, which cannot happen in a fiat money system (explanation: the federal government only borrows from the public. The public cannot "call" its loans to the government. As long as the government enforces its tax policies it will always have sufficient funds to service the debt).
That said, the next area that needs to be understood is macroeconomics. In its simplest form you have the public and the federal government. The federal government receives revenue from taxes and the sale of securities (borrowing). Both come from the public. The government always spends all of its revenue (the treasury only keeps enough money to meet short term obligations - we won't get into tax accounts etc.)
The recipient of the spending is the public. So no matter how much the government taxes or borrows from the public, the public receives the money right back. The public (as a whole) is no better or worse off (money wise) regardless how much the government taxes OR borrows. It all boils down to ALL government spending is a redistribution of money within the public sector. This is true of defense spending and Social Security.
So in conclusion, Social Security in its present form will NOT fail as long as the government enforces tax policies and only borrows from the public. However, that does not mean the system cannot be made better.
As previously stated, the US Treasury must balance spending with taxes and borrowing from the public. Failure to do so will result in changes in the amount of banking reserves and loss of control of the Fed funds rate (which is controlled by the central bank - "the fed")
So when baby boomers start to retire government spending (which we already defined SS to be) will increase. Therefore, government revenue must increase by an equal amount. The government has two choices: increase taxes or increase borrowing. Tax revenue will go up has a function of government spending because any money the government spends will translate into income for the recipient. Since the government taxes income it automatically recaptures a percent of its spending.
The amount recaptured depends on the tax rate of the individual receiving the spending (this may not necessarily be the person receiving the direct payment from the government, it could be the individual who receives secondary consumption of the money).
The best scenario is to get as many individuals as possible into tax brackets that pay a greater tax rate. This will require a trend reversal of income shifting from low wage earners to high wage earners. Although the income tax is progressive, SS is regressive. And considering capital gains and dividends (which are typically exclusive for high wage earners) are taxes at much lower rates, the overall tax rate of high income individuals is actually lower than mid income brackets. So bringing low wage earners up to the mid level will greatly increase tax revenue. No one wants to pay more in taxes, but if the tax increase is due to greater income, most low wage earners will opt for the greater income even if it means higher taxes.
The government only borrows from the public. This in itself is very confusing. Who is the government? Most would say "we the people" are the government. Who is the public? Again, most would say "we the people" are the public. So how do "we the people" borrow money from ourselves?
When the government "borrows", it actually sells an asset called a treasury security. U.S. Savings bonds fit this category. For every dollar of federal government debt there is an equal dollar asset in the form of treasury securities.
Lets look at what happens (in a macroeconomic sense) when the government borrows $100. The government sells a $100 security to the public. The government takes the $100 it received from the sale and spends it back to the public. The public now has the $100 back plus a $100 asset in the form of a treasury security. The next point of confusion about govt debt that needs to be cleared up is the fact that the govt NEVER has to pay off its debt. Individuals die and must settle all debts. But corporations and the Federal govt can "live" forever. Some corporations have been around for over 100 years and are still in debt. Why? They only need to have enough revenue to service their debt. The same holds true for the federal govt. The national debt has been growing since before WWII. From a mathimatical standpoint this implies we have not paid off any debt in 70 years. Just the interest. The interest payment is nothing more than redistribution of money (within individuals in the public). The public pays the tax and the public (who hold the treasury securities) receives the interest payment.
When the babyboomers retire the government can always borrow a portion of the money it will require to make SS payments. As expained above, the public as a whole will be no worse off if the govt must borrow.
So in conclusion, some of the increased spending will be self correcting by an automatic increase tax revenue. Optimizing this revenue is the key to keep borrowing minimal.