Consensus forming in among Washington politicians for cuts in "entitlements".

Social Security and Medicare “Solvency” is not part of the Commission’s Mandate

I note from Chairman Simpson’s conversation with Alex Lawson that the Commission has taken up the questions of the alleged “insolvency” of the Social Security system and of Medicare. If true, this is far outside any mandate of the Commission. Your mandate is strictly limited to matters relating to the deficit, debt-to-GDP ratio and fiscal stability of the U.S. Government as a whole. Social Security and Medicare are part of the government as a whole, so it is within your mandate to discuss those programs – but only in that context.

To make recommendations about the matching of benefits to payroll taxes – now or in the future – would be totally inappropriate. Within your mandate, the levels of payroll taxes and of Social Security benefits are relevant only insofar as they influence the current and future fiscal position of the government as a whole. Their relationship to each other is not relevant. You are not a “Social Security Commission” and there is no provision in your Charter for a separate discussion of the alleged financial condition of either program taken on its own. Such discussions, if they are occurring, should be subjected to a point of order.

The usual “solvency” arguments directed at the Social Security system and at Medicare as separate entities are in any event complete nonsense. These programs are just programs, like any others, in the Federal Budget, and the Social Security and Medicare “systems” are thus fully solvent so long as the Federal Government is. Further, as explained below, under our monetary arrangements there is no “solvency” issue for the federal government as a whole. The federal government is “solvent” so long as U.S. banks are required to accept US. Government checks – which is to say so long as there is a Federal authority in the Republic. This point has been demonstrated repeatedly in times of stress, notably during the Civil War and World War II.

As a Transfer Program, Social Security is Also Irrelevant to Deficit Economics.

Political discussions of “long-term fiscal sustainability” – including in the Charter for this Commission – make an economic error when they loosely use the word “entitlements” and suggest that supposed economic dangers of federal deficits (for instance, rising real interest rates) can be reduced by “entitlement reform.” As a matter of economics, this is not true.

“Government Spending” – as any textbook will verify – is a component of GDP only insofar as the spending is directly on purchases of goods and services. That alone is what economists mean by the phrase “government spending.” GDP is the final consumption of produced goods and services, and government is one of the major consuming sectors; the others being private business (investment) and households (consumption).

Social Security is a transfer program. It is not a spending program. A dollar “spent” on Social Security does not directly increase GDP. It merely reallocates a dollar from one potential final consumer (a taxpayer) to another (a retiree, a disabled person or a survivor). It also reallocates resources within both communities (taxpayers and beneficiaries). Specifically, benefits flow to the elderly and to survivors who do not have families that might otherwise support them, and costs are imposed on working people and other taxpayers who do not have dependents in their own families. Both types of transfer are fair and effective, greatly increasing security and reducing poverty – which is why Social Security and Medicare are such successful programs.

Transfers of this kind are also indefinitely sustainable – in fact there can intrinsically be no problem of sustainability with transfer programs. Apart from their effect on individual security, a true transfer program uses (by definition) no net economic resources. The only potential macroeconomic danger from “excessive” transfers is that the transfer function may be badly managed, leading to excessive total demand and to inflation. But there is no risk of this so long as the financial crisis remains uncured. Under present conditions Social Security and Medicare are bulwarks for stabilizing a total demand that would otherwise be highly deficient.

Similarly, cutting Social Security benefits, in particular, merely transfers real resources away from the elderly and toward taxpayers, and away from the poor toward those less poor. One can favor or oppose such a move on its own merits as social policy – but one cannot argue that it would save real resources that are otherwise being “consumed” by the government sector.

The conclusion to be drawn is that Social Security should in any event be off the agenda of your Commission, as it is a transfer program and not a program of public spending in the economic sense. In particular it does not use capital resources and will not drive up interest rates. This is true whether the “Social Security System” is in internal balance or not.