The release of the annual report on the Status Of Social Security And Medicare prompted the usual outpouring of column inches on the right and the left, but the saddest piece I read was undoubtedly the one by Michael Hiltzik. I was saddened as a student of economics - Mr. Hiltzik’s understanding of the definition of an asset and the fungibility of money would make a student in introductory accounting blush, but I sort of expected that.
What I did not expect was to be saddened as a student of physics - it seems that Mr. Hiltzik fundamentally misunderstands the nature of time. You and I will not be the same people tomorrow that we are today just as we are not today the same people we were 30 years ago (indeed, some of us were not even people 30 years ago!)
There are two fundamental ways to describe a country’s wealth: its quantity and its distribution.
And from these features come two of the greatest misunderstandings of economics. The first error is that an economy is a zero sum game: that one person gains only at the expense of another’s loss. But anyone who has ever assembled a bookshelf, or grown a plant, or even written a newspaper column intuitively knows that wealth is created or destroyed and only kleptocracies base their wealth on theft.
The total amount of wealth is constantly growing or shrinking: productive policies will help people grow their amount of wealth, while discouraging policies will shrink it. In fact, in the absence of wealth-creating activity the total amount of wealth must shrink as entropy performs its inevitable work. This misunderstanding creates the lie that some people are rich because others are poor, as though it is only the existence of the rich that keeps the poor from prospering.
The second misunderstanding is that people are fixed within the economy, or that the rich get richer and the poor get poorer. But anyone who was ever a poor a student before getting their first job knows that there is movement within the economy. The fact that there will always be poor students does not mean that those who are currently students will always be poor.
But this belief is the crux of Mr. Hiltzik’s argument. He argues that the indebting policies of the past, say, 30 years benefited “the rich” at the expense of the poor. Then, because the rich pay relatively more in income tax than in social security tax, raising those taxes is a sensible way to pay for our nation’s debts. But time marches on and those same people who were getting rich over the past few decades are now the ones who will be collecting on the benefits “they earned.” The people who will be paying for Mr. Hiltzik’s retirement weren’t around during those boom years of low taxes and solid job growth.
The truth is that those who are working are relatively income rich and asset poor, while those who are retired are relatively asset rich and income poor. Mr. Hiltzik’s economics would have the poor (those who are still earning benefits and accumulating assets) working and paying taxes to fund the rich (those who are collecting benefits and living off their assets.)
Those who are paying for the baby boomer’s retirement won’t be the baby boomers themselves, it will be their children who are working, perhaps paying down student loans, preparing to hopefully buy a house, and maybe save some for their own retirement. At the same time they are the ones sending a check to those who own the “assets” in social security. One hopes that, in addition to this inheritance of debt and labor, Mr. Hiltzik gave his children a better financial education than he acquired in his time.