Common misconceptions about the Social Security "crisis"

On his blog, Brad DeLong defends himself against Duncan Black. I respond:


Points 2 and 3 - fine. Point 1 - nonsense. Suppose Social Security is going to run out of money in 2040, meaning FICA tax revenue + interest on trust fund assets < outlays. Suppose to cure this the government raises taxes or cuts benefits a bit today. In 2040, there will therefore be greater tax revenue, less outlay, and more interest on trust fund assets (because of savings in previous years). The higher taxes and lower benefits in 2040 have a real macroeconomic effect - purchasing power, hence resources, are redistributed from workers to nonworkers. But the greater interest on trust fund assets is merely an accounting fiction. The interest is paid by one arm of the government (Treasury) to another arm (Social Security Administration), thence to Social Security beneficiaries. Unless we're willing to borrow more in 2040 than we plan to now, we will need further tax or benefit cuts to keep the overall budget balance from deteriorating. The lesson: we cannot by adding to the Social Security trust fund today provide for retiree benefits tomorrow. The only way to deal with the crisis in Social Security in 2040 is to raise taxes or reduce benefits THEN.

Caveat 1: if raising taxes or cutting benefits today increases national savings, then doing so today does help us out in 2040. But there are a lot of ways to increase saving that do not involve taking money out of grandma's pocket or raising taxes on the working poor and middle class. Let's try some of those instead.

Caveat 2: if instead of taking today's tax revenue and putting it into government bonds with the intention of using the interest payments on those bonds to finance retirees' benefits in 2040, you take today's tax revenue, buy millions of cans of beanie weenies, and stack them up in a warehouse somewhere with a lock with a timing mechanism preventing it from being opened until 2040, then you would be doing something today to secure the retirement benefits of future generations. But that's not what you're proposing, is it?