The Congressional Budget Office (CBO) in its article “Social Security Reform: The Use of Private Securities and the Need for Economic Growth” at http://www.cbo.gov/showdoc.cfm?index=4011&sequence=0 sets forth the often quoted statistic about Social Security: “The Social Security Board of Trustees projects that the system's tax revenues will begin lagging behind its expenditures in 2017. At that point, even though the Social Security trust funds will have credited balances for 24 more years . . .”  But, is money the real problem?  Would more money allow Social Security to function forever into the future?

The CBO clarifies the real problem.  In 1970, there were 4.4 workers per retiree.  By 2030, this number will drop to 2.6 workers per retiree.  The real problem is production.  Fewer and fewer workers will be required to provide the goods and services to be consumed by an increasing non-producing population of retirees.  Thus, the solution cannot be to simply pile up money, but must be to drastically increase the productivity of those who will be working in 2030, increase the number of workers so that the worker/retiree ratio is greater than 2.6/1, or raise the ratio by decreasing the number of retirees.  In other words, the solutions will be found in technology, immigration and a higher retirement age.

Most debates over Social Security focus on money.  Some believe the solution can be found by placing more money in the Social Security trust fund account, which purchases treasury bonds, and thus helps to fund our current budget deficits.  Others see a solution in privatization, and investment in private sector stocks and bonds.  Both proposals miss the real problem.  Instead of dealing with production in future years they deal with claims. 

The United States has never defaulted on its debt.  U.S. government securities are thought to be the safest of all investments, because it is unimaginable that the United States would fail to honor its commitment to pay back the holders of its debt.  Those who argue that the solution is to buy more government securities are in effect arguing that the United States government will take what ever action is needed to ensure that retirees in 2030 will be served their piece of the pie.  This may mean imposing increased taxes, and reducing services to the workers of 2030, but when push comes to shove, in order to avoid default the United States government will take consumption away from workers and deliver it to the retirees.

The privatization argument simply shifts these claims to the private sector.  The retirees as holders of claims against the private sector will have a legal right to insist the private companies deliver more of the pie to retirees, rather than to the workers of the future.  However, in one sense I have overstated my case.

If either increased government or private savings from Social Security is invested in the development of technologies that significantly increase worker productivity, currently putting more money into the Social Security system could help increase future production.  But, increasing future production is the key.  There is a considerable amount of hope in the idea that increasing productivity will allow 2.6 workers to support a retiree, without severely reducing the workers’ standard of living.  Technology has been increasing exponentially since the time of Adam Smith (1700s).  It is this amazing rise of technology that provides us with the highest standard of living that the world has ever known.

For those of you that follow computers, you have probably heard of Moore’s Law.  Moore’s Law says that the number of transistors on a computer chip (and thus its processing power) will double every couple of years.  Gordon Moore made this observation in 1965, it still holds today, and looks like it will continue to hold in the foreseeable future.  (http://www.intel.com/research/silicon/mooreslaw.htm).  This doesn’t simply mean the technology will continue to advance, but that it will continue to advance at an ever accelerating rate.  Thus, with an exponential increase in technology and the productivity that accompanies it, in the United States 2.6 workers may be able to comfortably support one retiree by 2030.

While the population of the United States is aging, Mexico has a relatively young population.  While only 21% of the current U.S. population is under 15 years old, 32.8% of Mexico’s population falls in that category.  (http://www.cia.gov/cia/publications/factbook/) The United States could adopt an aggressive program to bring younger Mexican workers to the United States, and increase the worker to retiree ratio.  With immigration, the ratio does not need to decline to 2.6/1 in 2030.  Of course, this raises numerous other issues about immigration, education, national security, etc. that I will not cover in this paper.  I simply want to point out that it does present at least a partial solution to the problem of an aging population. 

The ratio of worker to retirees can also be reduced by increasing the retirement age.  When Social Security was established, the average life expectancy in the United States was less than 65.  In other words, the program was designed so that most people would not live long enough to collect benefits.  For those that made it, their retirement period was normally short.  Today, the average life expectancy in the United States is 77.4 years (http://www.cia.gov/cia/publications/factbook/).  This will only increase in the future.  As people live longer, their productive lifespan can also increase. 

The CBO has done an excellent job in summing up the situation in the article cited above, so I will finish with a quote from that article:

Much of the recent Social Security debate has revolved around the question of how to establish claims on future resources. The use of private versus public securities, the creation of personal accounts, the scheduling of future tax increases, and reliance on future borrowing by government are all means of financing that prescribe how resources would be drawn from the economy to meet retirement claims. They are not options that will predictably build the resources to meet those claims, and some could be harmful.

It may be important to decide for the coming decades how best to divide the roles of Social Security and private means in paying for retirement. However, it would be a mistake to assume that higher retirement costs in the future could somehow be met simply by building up the Social Security trust funds with public or private securities or altering the mix of methods, public versus private, by which future retirement claims are established. In the end, those options are simply financing tools. They may have different distributional impacts among members of society (affecting who pays, who receives, and how much), but by themselves they will not answer the question of how to produce more. Increasing aggregate national savings (as opposed to trust fund balances); pursuing policies that increase productivity; and encouraging people to work longer are paramount. No matter how much nominal wealth can be traded or cashed in to produce given levels of retirement income, it is the amount of goods and services that can be furnished that will determine society's economic well-being.