This is interesting, publiuspundit writing in full disgusted stream-of-consciousness (“empire of thieves”), on what this topic can look like, run wild on the socialist side, down Cuba way.

Here’s a Cato analysis of the Social Security opportunity cost going forward:

http://www.cato.org/pubs/ssps/ssp7.html

They estimate the opportunity cost of NOT privatizing (as of 1996) at $10-20 trillion.

Conservative assumptions imply that Social Security privatization would raise the well-being of future generations by an amount equal to 5 percent of gross domestic product (GDP) each year as long as the system lasts. Although the transition to a funded system would involve economic as well as political costs, the net present value of the gain would be enormous?as much as $10-20 trillion.

I was born in 1963, which was the US’s largest birth cohort of the baby boom. (Other years in the 50′s had higher birth rates but that was because the populations — the denominator in birthrate — were smaller then.) The 1964 cohort was somewhat smaller, and in 1965 the birthrate collapsed. So I’ve spent my whole life at the edge between baby boom and baby bust.

My grammar school class was the last big class the school had (we were 70, the class behind us was 50, and 3-4 years younger they were at 25-30.) The high school district had two high schools in it until the class of 1981 (the 1963 birth cohort) graduated and they merged down into one school.

Ok, so look at retirement from the 1963 (Class of ’81) perspective… When we are 55-65, the huge bulk of the baby boom will be living out their retirements. They will not be working, so they won’t be paying payroll taxes. One way or another, their retirement savings will be out there flooding the capital markets. This is true whether they manage their own IRA’s, or whether they give their savings to an annuity company, and the annuity company invests it in the capital markets.

So in the years leading up to my retirement, my retirement savings will earn lousy returns. But there will still be robust labor markets, because the largest birth cohorts are still working (and saving for retirement.) And we’re going to be paying for all those retirees’ medical bills. Both of which mean that my wages will be flat or declining.

Then I get to retirement age. (Which I figure will be about 75…) The labor market is very tight behind us, because there aren’t enough people. So wages go up. Investment returns are still anemic, because after paying all those expensive employees, enterprises don’t have much left for return on capital. Sure, as the markets take away the retirement savings of the older boomers and give them as wages to the gen-X, Y, Z workers then the supply of capital goes down and that should help.

But it’s going to be just like schools closing in the 80′s as the economy has to shift around to adjust to different demographics. The bottom line is that the demographic effect is that people retiring in the last 10 years and next 10 years will be significantly better off than the people (like me) retiring in the 20 years after that. Not because social security is a ponzi scheme, or people who got money who didn’t pay in, or whatever. But because of the basic economic law-of-supply-and-demand which says that each person born in 1963 is less valuable because there are more of us.

You are absolutely right, photoncourier, that globalization is our only hope. If the Indians and Chinese (3/8 of the world’s population) become capitalist economies, their young people are going to need our capital to produce the unimaginable wealth which is the natural product of human endeavor when it is not crippled by kleptocracy.

Forget “social security reform.” What we need is human freedom — the wealth created by freedom can fund vast amounts of foolishness. Yeah, there are lots of things which are stupid about the system that we have, but that’s small potatoes compared to the wealth-destroying effects if India, China and/or Russia stay (or fall further back) in their productivity-sapping fascist/socialist authoritarian command-economy kleptocracies. Look at Europe. It’s not just the aging population, it’s that the Europeans have so crippled their economies that somehow they can’t find jobs for many of the (relatively) few young people that they have.

Also, why does supply of capital go up as baby boomers begin to retire? They’re in the capital accumulation phase right now; as they begin to retire, to the extent they dip into capital this will *reduce* the supply of capital.

A real discussion about social security would be enlightening, but that requires real economists, using real demgraphics, to determine what happens to capital markets when significant portions of investors divest.

BingBingBingBingBing!!! We have a winning answer here. The main problem with the social security debate is that the “private account” folks are always making wild goofy predictions about what investment returns are in the future based upon what they have been in the past. The first law of economics is the law of supply and demand. (Demand curves slope downward.) Economic activity is a combination of labor and capital. The value of labor and the value of capital are, like all goods, a function of supply.

And the coming demographic “train wreck” is all about:

1) The supply of labor going down and the price of labor (wages) going up;

and

2) The supply of capital going up and the price of capital (investment returns) going down.

Make all the snide comments you want about pay-as-you-go and ponzi schemes blah-blah-blah, but you have to understand that, in the macroeconomic sense, the whole economy can only be pay-as-you-go.

So what happens when we get to the 2 working people for every one retired person stage? A whole bunch of things, and they all work in the same direction.

1) The supply of capital, in the form of the baby boomers’ retirement savings, will go way up. This means that your capital will compete against your cohorts’ capital, and drive investment returns down. To put it in concrete terms: $1 million in retirement savings, 6% returns — comfortable $60K/yr in income; 1% returns — eating cat food on your $10K/yr income.

2) If the total population goes down, the total demand for capital also goes down. Capital goes to producing stuff that people will buy; less people, fewer customers. So not only does the “pie” need to get divided up into more pieces, but the whole pie is smaller.

3) As the supply of working people shrinks, wages will go up, and so things will become more expensive, especially things which have lots of labor as components. Capital-intensive things (big old houses on big lots) will not increase in value at all or will decrease in value, while labor-intensive things (home health-care aides) will. So if you were planning on eating cat food, well, those high-income wage earners splurging on their pets are going to price you out of the market for that, too.

4) As wages go up, this will draw all sorts of people into the job market. Especially any seniors who have the physical ability to work and want to eat your higher quality cat food. Increased wages means increased social security tax receipts.

Ultimately, all of this creates a single process. At every step of the way, retired people will be relieved of their retirement savings, and that money will go into inflated wages for working people. Where it will be collected as social security taxes and paid back out as social security benefits. But the predictions of bankruptcy of social security which result in social security benefits ending are overblown. The future working people are going to relieve all of the savers of their savings, and the government is going to take its cut, and *bing* that’s where the future benefit payments will come from. Certainly those retired people with savings will be somewhat better off than those without, just like now, and people with children and grandchildren helping to support them will be better off than the people who didn’t have kids because they thought that the world was overpopulated, but it’s not going to be nearly the sort of effect that the “bankruptcy” folks are squawking about.

And most importantly, there isn’t going to be a “bankruptcy” in the sense that payroll taxes won’t pay for benefits, but what is going to happen is that capital gains tax receipts are going to collapse. That can probably be made up for by making the self-employment/social-security tax a flat tax rather than a regressive tax.

How much wealthier would this nation be if the trillions of dollars spent on these various programs had remained in the private sector where it had been saved and invested and earned market rates of return compounded over decades?

America currently has a $12 trillion economy. Would it be $15 trillion if we hadn’t had these programs? $20 trillion, $30 trillion…? Who knows?

There is an odd sort of “means testing” for SS now. Unfortunately it is based upon earned income. If you are collecting SS payments and you work then you have to be careful about how much you work since beyond a certain level of income (and it isn’t very high) the SS becomes taxable. You could have a million a year in unearned income and not jeopardize the taxability of a dollar in SS payments.

At some point though it will surely have to be means tested and some folks denied their $12,000/yr ’cause, well, they just don’t need it.

But until the thing is caving in around people’s heads nobody will do anything. The gummint needs the dollars and people see the money as theirs (which, of course, it was up until the moment Uncle grabbed it).