Arnold Kling  

Real Social Security

Lawyers in Government... The Sun and Global Warming...

Jeremy Siegel writes,

The reasons why retirees cannot turn their savings into consumption is because wealth can only be transformed into goods and services if they are sold to those willing to defer their consumption. In a modern economy, wealth does not represent "stored consumption," such as a cache of acorns that squirrels bury to bide them through a long winter. You cannot consume your stock certificates, but must sell them to someone else who wants a chance to consume at a later date. If there is a shortage of these savers, this may cause a long and painful bear market in stocks, bonds and real estate that will leave retirees with insufficient assets to enjoy retirement.

This reminds me of one of the first essays I posted on the Internet, called Farmers and Parasites. I wrote,

Consider an economy with two types of people and only one good, food. Farmers both grow and eat food. Parasites simply eat food. Food cannot be stored. It must be consumed right after it has been produced. Notwithstanding the pejorative name, everyone agrees that feeding the parasites is the just and humane thing to do.

Now, suppose that we can forecast that in twenty years the ratio of parasites to farmers is going to rise sharply. What can we do?

There really are only three ways this situation can be resolved. One or more of the following must occur.

1. Productivity can rise, so that farmers grow enough for everyone.

2. We can cut back on the food given to parasites.

3. There will be less food for the farmers.

To me, the safest and fairest option is to cut back on what we promise the future parasites. In terms of social security, this means reducing future benefits. Of the various ways to do this, the one that I favor is raising the retirement age.

Siegel reaches the same conclusion.

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CATEGORIES: Social Security

COMMENTS (6 to date)
KipEsquire writes:
"You cannot consume your stock certificates..."
But you can most certainly consume the dividends. Or, in the case of bonds, the interest. And (most) bonds mature at some point -- at which time you can consume the principal. And Treasury securities do not default.

That's an awful lot of "Swiss" and very little "cheese" in this Swiss cheese argument.

In other words, Siegel's warning is overinclusive. Those who do not save will be "punished" for that in the long run -- no news there.

But those who do save will, most likely, in fact benefit from higher income opportunties as interest rates begin a steep secular rise as the federal budget spirals increasingly out of control. (Remember, retirees tend to prefer income securities rather than capital appreciation securities.)

So the demographic situation may very well change the asset mix away from zero-income instruments (e.g., non-dividend-paying stocks). But that's very different from "a long and painful bear market in stocks, bonds and real estate."

Stated differently, I have very little fear that the U.S. government will stop issuing bonds any time soon -- at ever increasing interest rates. So anyone, pre- or post-retirement, who has the cash to buy them will be fine. That's the rub, of course: making sure you have the money to invest in the first place. But again: no news there.

quadrupole writes:


You are missing the point of the farmers vs parasites argument. When you subtract out the money what you are really left with is exactly what Arnold describes, only so many goods and services are produced each year. You either give them to the parasites or the farmers. What capital investment does is increase the productivity of future farmers (contributing to solution 1). When an individual saves for retirement, they are part of the solution (increasing productivity).

A pay as you go social security system however does *not* do *anything* to improve productivity, it simply takes food from the farmers and gives it to the parasites. This is the main reason why privitization of social security is crucial, because it increases the rate of capital formation and thus increases productivity and makes an attempt at solution 1.

Think of the choices this way:

1) Increase productivity (privitize social security)
2) Cut back on food given to parasites (reduce benefits)
3) Less food for farmers (increase social security taxes)

Don Lloyd writes:

It makes no difference whether you invest in stocks, bonds, gold, or rare postage stamps. It makes no difference whether you earn an annual return of 0% or 20%. At the end of the line your financial assets at that time only serve to enable you to bid for whatever consumption goods and services may actually then exist or can be made to exist. You may be able to win the financial race individually, but everyone cannot win beyond the extent that the supply of consumption goods and services has been increased, something that only a small minority of possible investments contribute to.

Regards, Don

Randy writes:

As long as people can still collect some benefits at age 62, I'm all for raising the age for full benefits.

The thing is, regardless of what happens to Social Security, I think most people will stop being particularly productive in their mid 60s. I'm speaking from my own experience of course - just looking around the office... and knowing I'll probably act the same way after I've been here another 10 or 12 years.

Bill writes:

I know many people that are quite productive in their sixties; they either like their work or they need the income. If the minimum age for SS benefits were to increase to 70, I imagine we'd see people in their sixties working much harder.

Randy writes:


I know some older folks who work quite hard. I'm sure its quite common in the professions. But here in the cubicles I see a great many who are just putting in their time. Would making them work 5 years longer make them work harder? I doubt it. I think it would just mean they'd keep putting in their time for 5 more years.

And once we've created an incentive for employers to get rid of older employees, what would the government do with people over 62 who "can't find" suitable employment? I suppose we could just let the old guy and his old wife starve unless they take a job cleaning rooms.

So sure, cutting $100/mth for retiring at 62 is a great idea. But trying to get people to keep working - I don't see it happening.

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