A link relevant to the public debt/intergenerational transfer point

In the last post, there was some discussion of the difference between transfers to fund consumption by the elderly (Social Security, Medicare), versus borrowing to make public investments.

I've never liked calling Social Security a "Ponzi scheme" precisely because there isn't anything like the duplicitousness of a Ponzi scheme involved, and of course whether or not you're the one who holds the information in a Ponzi scheme matters a lot when you're assessing whether you like the Ponzi scheme or not! So that label obscures more than it illuminates when it comes to Social Security.

But of course insofar as Social Security is a paygo program, it does have elements that are similar to a Ponzi scheme. We need to make sure it's a sustainable Ponzi scheme based on the best projections of revenue and outlays that we have, and we need to be prepared to adjust revenues and outlays if we want to continue having this "Ponzi scheme"-esque transfer program (and Americans overwhelmingly do want to have the program).

The thing is, this "Ponzi scheme" is not the sort of thing you want to finance with debt! If you're curious why, read Nick's post (that's the sort of thing his post is more relevant to). The money goes to consumption by the elderly, not investment, so the program is ultimately constrained by income growth. At some point, if the entitlement is growing too fast, the difference has to be made up by raising taxes and somebody in the future loses.

That's why Social Security in this country is funded by current taxes, not by debt. Things are kept very clear. Each year, young people lose and old people win. Each year young people and old people alike vote for represenatives that are going to preserve or end this arrangement*. And an actuary keeps an eye on things and makes sure the transfer arrangement can keep trucking along year after year.

Until recently, that is.

One of the negative consequences of the otherwise advisable payroll tax cut has been that Social Security has been funded out of the general fund (which is partly financed by deficits), and that sets a dangerous precedent. This Washington Post article details the issue.

Nick Rowe wrote in the comment section of the last post that Social Security and the public debt question are "very much the same". I don't think that's quite right. Social Security is traditionally paid for by taxes, and the only intertemporal element to it is that an actuary and the Congress tries to maintain some continuity in the program. This is not the case with public borrowing, where there is a legally binding intertemporal element. That's a good thing that the two are different. Social Security is consumption spending. For all the reasons Nick lays out, that's a bad thing to finance with debt.


* - I can think of at least two reasons why a young person would vote to keep such a program, and both are reasons I ascribe to. First, that the elderly are deserving of this benefit. Given the way modern society is organized, poverty is a real risk in old age if retirement savings are constrained and continued wage income is not a possibility. We don't die working anymore. That's a good thing, but we love our elders, so we want to make sure they have a safety net. That's the first reason. The second reason, of course, is that it sounds nice to have a safety net in old age and I know that if I vote to maintain the safety net now my chances of enjoying a similar safety net when I'm old increase.