There was a time when, in order to make one’s money increase, one had to find a private venture to invest in. This was risky, but when the venture succeeded it also created a great deal of wealth for not only the investor but for many other. If British citizens invested in a successful railroad in America, the railroad would make a great deal of money transporting goods and people. But it only made that money because it delivered an important service at a much less expensive price than was available for. Suddenly a trip that could only be made over weeks by covered wagon became a journey of a couple of days. Farm produce from the frontier could be transported to the East Coast much more cheaply.
What this meant was that the only way to get interest on one’s money was to build up capital and delay consumption. By choosing not to use money for consumption in the present, a person could use it instead to build railways and other productive enterprises in the future. Then, in that future, he would get paid more money than he had originally saved.
But at some point nation-states began wanting more money, so they posed as “investments.” They sold bonds (which is the same thing as borrowing money) so that people could “invest in” the nation.
All the money paid as a tax to social security is “saved” by this process. The money is used to buy government bonds which are then later to be cashed in when there is a need for the money.
But when you buy a bond from the government, your money is not used to create new capital. Typically, it is simply spent on immediate consumption. Nothing is built (at least nothing that anyone wants). Nothing is really invested. Instead, the one who is hoping to get the interest that the bond promises is merely betting that the government can increase taxes in the future and pay the bond owner from those revenues. No value is added.
So, when your money is “saved” from your payroll tax to “go into” social security, it is actually used to buy treasuries. But that just means that your money that is “saved” in social security is actually loaned to the government and immediately spent. Nothing is saved at all. Whether or not Social Security can be paid depends entirely on whether or not current taxes can be raised high enough to cover them.
Politicians deny all this and pretend that only “extreme” people believe in such basic economic truisms. But lately Timothy Geithner, in order to make Congress raise the debt ceiling, has admitted the truth. He wrote a letter to House speaker Boehner:
“The U.S. government makes approximately 80 million separate payments per month. These include payments for Social Security; Supplemental Security Income; Medicare; Medicaid; national security needs, including military salaries, military retirement, veterans’ benefits, and defense contractors; income tax refunds; federal employee salaries and retirement; law enforcement and operation of the justice system; unemployment insurance; disaster relief; goods and services sold to the government under contracts with small and large businesses; and many others. If Congress does not act to extend borrowing authority, all of these payments would be at risk. This would impose severe economic hardship on millions of individuals and businesses across the country.” (emphasis added)
So, according to Geithner’s own words, Social Security payments are not derived from savings. Not they have to be borrowed just like any other expense.
Social Security is bankrupt. So is the government. Geithner is advising us to use to bury ourselves deeper in debt without a hint of a plan for a crash landing.