Most people in Washington do not understand how our fiscal & monetary system works. While most of them "know" that we are no longer on a gold standard, few understand the consequences. This is especially true of conservatives who think that the United States is going to somehow "go bankrupt". This is despite the fact that the U.S. can make money at will, which makes it's budget constrained by inflation, not revenue. If believing in fictional budget restraints was a purely conservative psychosis, I probably wouldn't worry that much. The problem is that conservatives often pull otherwise reasonable liberals into their budgetary fantasies.
Case in point was the Social Security "deal" between Ronald Reagan and the Democrats in congress in 1983. It was the largest redistribution of the tax burden from the wealthy to the working class, but was celebrated as a "a happy day for America" by the democratic leadership in the house. Because they didn't understand how our (relatively) new fiat money system really worked, they thought they were saving social security. Instead they increased the size of a regressive tax to make room for Reagan's tax cuts for the wealthy.
To see how this budgetary 3-card-Monte trick hurt us let's first take a look at how it was supposed to "save" social security. The problem was that, among other things, the coming retirement of the baby boomers was going to increase the ratio of retirees to number of workers which would cause more money flowing out of the social security trust fund than in and would cause it to go broke. Therefore the leaders of the time figured they would plan ahead and build up the social security trust fund so that the baby boomer generation could help fund their own social security benefits. Problem solved, right? Wrong. If you don't see why this didn't "solve" the problem, don't feel bad. Most of the country, and probably no one in the government got it in 1983 and most still don't get it now.
To understand why this didn't really solve anything, let's look at a more simplified example of the problem. Let's say there is an island of 100 people. There are 98 adults and 2 children on this island. When the adults are all about 40, they realize that when they are 65 or 70 there will only be 2 people left on the island to take care of them, grow their food, fix their houses, and take care of their medical needs. To "solve" this problem, all the adults hoard their money until they are old. When they all retire or are too old to work, they give all their money to the 2 young workers on the island. Does this extra money help the 2 workers do their work? Of course not. What they need isn't money, it' more goods and more workers. Or at least machinery and technology that will make them more efficient at growing the food, fixing the houses and providing medical care to everyone. No matter how much money the 98 adults save, it won't help the last 2 kids take care of them when they are older.
After taking a look at the island example, you can start to see how the social security trust fund isn't going to solve the underlying issue. People in Washington are obsessed with money. So when they hear about the problem of more retirees, they think it's a money issue. But it's not a money issue. It's about the amount of resources that our economy can produce. If you have fewer workers, you're going to produce fewer goods and no amount of money is going to change that. Even setting aside the absurdity of the federal government "saving" dollars(because it can create dollars at will), you can see the absurdity of the entire nation trying to "save money" to fix the problem of fewer workers. Money is not a durable good that can benefit future generations by previous generations saving money.
To understand how badly the 1983 deal not only didn't solve the issue, but made it worse, let's go back to our 100 person island example. While the 98 adults of the island were all trying to save money for their retirement, they cut a lot of corners in their life. They built smaller houses with cheaper materials. They tried to "save" money by spending less on educating the only 2 children on the island. To save even more money, they continued to farm using old farming equipment instead of buying big tractors that would make farming easier. So what happened once the frugal adults retired? They found out that the 2 children couldn't keep up with the work because they didn't have any tools to make them more efficient, and even worse, they didn't have the education they needed to make them as efficient as the adults. By saving money for retirement, the adults actually made the problem worse because now the children didn't have the tools needed to do all the work that needed to get done on the island.
This lesson can be applied to the U.S. situation. So what was the end result of the 1983 increase in social security taxes? It didn't solve the REAL problem of more retirees and less workers. And worse, it resulted in the federal government taking more taxes from the poor and working class while Reagan and his allies were at the same time cutting taxes for the wealthy. It nearly increased the regressive social security tax. The SS tax is regressive because it is a flat tax and is capped at a certain level of income. Finally, with the increased Social Security tax, it made room for tax cuts that mostly benefited the wealthy to stay in place from the Economic Recovery Tax Act of 1981 and future tax cuts. Finally, the absolute worse thing it did was that in the federal government's effort to be frugal with the social security trust fund, it is in turn spending less on education, less on research and technology, and less on infrastructure investments that will all help our kids create the same amount of goods and services with fewer people.
The working class got Shanghaied into higher taxes by thinking that they were providing for their own retirement. Meanwhile the deflationary effect of the higher payroll taxes was counteracted by lower taxes for the wealthy. All of this was sold as a "good deal" because nobody really understood how the fiscal and monetary system worked. That is the legacy of the 1983 "Social Security deal".
Please don't take any of this to think that I'm one of these "the social security trust fund is an illusion" people. I do believe that it exists, it should be payed out to retirees on schedule as it was intended. However, I also believe that we shouldn't worry about it running a deficit and should rewrite the Social Security Act to allow it to run a deficit. The point of all this is to get the left to understand how our lack of understanding the money system can allow us to be duped by conservative "deals" and institute counter-productive policy. We cannot allow ourselves to be dragged into the conservative fantasy that the federal budget has revenue constraints. I have no hope of convincing conservatives of this because they are emotionally and ideologically invested in fictional budget constraints so that they can institute their plan to destroy popular social programs. Such as when they wanted to "privatize" social security. They tried to sell it as "people will be able to better save their own money". Demonstrating that they both want to destroy social security, and the fantasy that everyone saving more money will solve the problem.
So what is the solution to the retirement problem? Their are several REAL solutions to consider. All you have to do is to temporarily take money out of your thinking. I am not necessarily advocating all of these, just listing them as possible solutions. I am listing them in the order of what I believe would be the most effective solutions.
First of all, while we have the workforce now, we need to build things whose value will last. For examples of this, think of things like the Hoover Damn, interstate highways, and other projects that have a lasting benefit for society.
Second, we need a more efficient work force. This can only happen if we invest in our children's education and in new technologies - like factory automation - and other things that can increase the amount of output that 1 person can accomplish. In other word's our government should be spending money on these things, not trying to save money for later.
Third, encourage immigration of young workers from other countries. That will increase the number of workers without increasing the number of retirees.
Fourth, we can encourage older workers to stay in the workforce. Conservatives mostly advocate this by trying to raise the retirement age and reduce social security benefits. While this "stick" methods might work, progressives can offer "carrot" methods. For instance, better protection for age discrimination. Don't force companies to pay for older employee's health benefits(have the federal government cover them). OSHA can have special regulations for older employees to take care of unique needs.
Fifth, we can save foreign assets. Granted this is a "money" solution. The difference is that instead of saving our own currency, we save foreign currency. That way we can employ other countries to give us the needed goods and services we'll need. The problem with this is that it would require massive government intervention to enforce this. We would have to setup trade barriers so that we sell as many goods to other countries and buy as few goods from them as possible to gain their foreign currency - basically the opposite of what we're doing right now. This has several risks. First of all the government would have to spend resources enforcing these trade barriers, and second of all, we risk losing our investment if the foreign country devalues and inflated their currency. I don't have a lot of faith that this would actually work, that's why I list it last.
Overall, I think the first 3 solutions are the best ones. Unfortunately, most politicians instead of instituting those polices keep talking more about "saving money" now. I suppose a sixth solution would be to make the social security tax a progressive tax. This doesn't really solve the underlying problem, but it would certainly shift the tax burden from the poor back to the super rich and undo the damage of Reaganomics. It would also help to "share" the burden.
The information in the diary is heavily influenced by a concept known as Modern Money Theory. It's a relatively obscure "post-keynesian" (despite some of the ideas it's based on influenced Keynes theories) economic school of thought that starts with basic facts like "government can create all the money it wants" and ends with a way we could have both stable prices(i.e. low inflation) and truly FULL employment in this country. So if that sounds like a really good thing to do, or you just want to learn new ways to demolish false conservative talking points, I highly encourage you to follow me as I do more diaries on Modern Money Theory.
If you can't wait for me, then I suggest you check out these sites that have more information.
Warren Mosler's Blog and Website
Some scholarly papers at the Center for Full Employment and Price Stability
Also, please follow the MMT tag here at DailyKos. I am not the first Kossack to have stumbled upon MMT.