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The Problem With Social Security

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Mike Kemp  | Getty Images

Modern Monetary Theory economist Randall Wray's a bright guy. I've learned a lot from reading his papers on a vast array of topics.

But sometimes even the brightest folks have blind spots. His latest blog post over at New Economic Perspectives makes it clear that some sort of curtain falls across his mind when he attempts to consider the unintended consequences of vast government spending programs.

As you might recall, I wrote a bit about Social Security the other day. The point I made was relatively uncontroversial: Social Security diminishes fertility because it diminishes the dependency of the elderly on the labor of their children. This fact is now so well established in the economic literature that denials can only be attributed to a lack of acquaintance with the evidence or a general immunity to data.

Dwelling on Wray’s description of the fertility-diminishing effects of Social Security as “a bit of a stretch” wouldn’t be very constructive. He really only makes a half-hearted attempt to deny the undeniable in his post, and quickly moves on to celebrating the fall of fertility.

What are Wray’s grounds for celebrating the fall of fertility in the United States? Well, he’s got some weird notion that people are poisonous to the planet. Fewer children are “better for the environment and long-run sustainability of the species,” he asserts.

Now, it’s true that rapidly rising populations can create economic problems. But it’s also the case that falling populations create economic problems. The simplistic notion that fewer children is always better is just nonsense. It reduces itself to absurdity very quickly: when the last people on earth died childless, would this be an improvement for the long-run sustainability of the species?

The oddest part of Wray’s argument, however, is not his foray into demographics. It’s the economic argument he makes.

Wray argues that people would have to save more if there were not Social Security.

Workers of each generation will need to set aside more savings (to avoid being turned into canned food or reduced to dumpster diving or living with ungracious kids who are resentful that they got stuck supporting parents who live too long) over their whole lifetime. So consumption out of wages will be chronically insufficient for firms to recover costs. Sales will chronically fall short due to the “sinking fund” of worker saving. The inducement to invest and innovate would be much lower. AND THEN SAVING WOULD BE LOWER!

This sounds plausible if you completely ignore what came before it: the discussion of demographics and fertility.

Workers of each generation only need to set aside more saving if they cannot depend on the income of their offspring to provision them in their elderly years. Which is to say, it is the decline in fertility that causes savings to rise, consumption to fall short, and income to subsequently drop.

Working people with a more robust fertility rate actually save less, consume more, and therefore earn more. This is possible because they can be confident that they can rely on the income of their offspring to supply them with the means to a decent living in their retirement. Having children accomplishes the goals of savings without the economic drag.

Wray doesn’t seem to grasp this at all. In fact, he argues that children and the elderly are equivalent because they are both economic dependents. The difference—that our children typically will be income providers for our dotage while our grandparents generally will not—is completely lost on him.

Does this mean we should just do away with Social Security? Of course not. But it does mean that we should look for ways to reform Social Security so that it isn’t influencing fertility as much. Here are some suggestions from my friend John Zmirak.

When Social Security was expanded in the Johnson-Nixon years, lawmakers did not anticipate the effects on fertility the changes would have. Congress passed the Social Security Amendments of 1972, which raised pension benefits by 20 percent, while economists were projecting a continuation of the Baby Boom fertility rate of 3.6. By 1975 the fertility rate had dropped to 1.8. In other words, the drop in fertility was an unanticipated accident.

The moral of this story, of course, is that we need to be very cautious when erecting vast government programs. Very often they have unforeseen consequences that can undermine their own goals.

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