With a title like that -- Social Security as a Source of Space Funding --, you might suppose that I'm either the most larcenous space enthusiast in town, or in reality a Social Security enthusiast who just thought up a "space" angle for an excuse to speak here. Actually, I am a space enthusiast, and beyond that, I envision an immense, glorious human future. Visit my website and see what I wrote in 1971, in I Have a Pipedream. The move into space is only a part of that vision, but it's a large part, and like some other parts, it will require great gobs of long-term investment. That's where Social Security comes in, and there's no larceny about it. Social Security should have been founded upon investment to start with.
In the last ten years, it has gradually become conventional wisdom that Social Security faces a crisis. The crisis, it is said, lies in the fact that a big bunch of baby boomers will reach retirement age and have to be supported by the smaller generation which they procreated. Not only that, but retirees are living longer than originally planned, so younger workers will have retirees on their back for what may be decades.
That's the perceived crisis. In my view, it's an artifact of perceptions -- but the perceptions are designed right into the system. Social Security was originally conceived as an obligation to be passed along from generation to generation. Each working generation would support a cohort of retirees, and be supported in turn by a later generation when their own time came to retire:
No one took into account that a smaller generation might be stuck with a larger generation to support, or that geezers might live on and on. Moreover, a psychological point was built into the design: the funding was based upon a payroll tax. Taking it out of workers' paychecks and handing it directly to retirees created a perception that could only make trouble: that retirees ride upon the shoulders of the working population. It not only created that impression, but institutionalized it.
These effects could have been avoided if Social Security had been designed from the start as an investment-based system. That is, instead of handing the intake of payroll taxes directly to retirees, the system should have invested the money in projects which would maintain and grow the output of the economy.
After a suitable time for the capital to do its work, retirees would begin to draw upon a share of the national output whose very existence could be attributed to their own investment. It wouldn't matter if the next generation were smaller; their payroll taxes would be going into the next wave of investment, not into the immediate support of retirees. As for the retirees, if they lucked into longer lives, only the return on their capital would have to last longer, not an ordeal imposed upon younger workers.
In 1983 a small step was made towards an investment-based system. Foreseeing the baby boomer crisis, Congress raised the Social Security taxes beyond what was needed to pay current benefits, and directed the surplus into a Social Security Trust Fund:
The fund invested this money in what it considered the safest of securities, namely, government bonds.
In 1990, Senator Moynihan of New York created quite a stir when he attacked this scheme on the grounds that the money passed back to the Treasury by the Trust Fund was in no way sequestered from any other money taken in by the Treasury. He had originally supported the Trust Fund on the grounds that it would be used to grow the economy, making it easier for subsequent workers to support future retirees. However, he said, the Republican administration had merely "embezzled" the Trust Fund intake to support general government expenditure.
It struck me at the time that whether this amounted to "embezzlement" or not would depend upon which government expenditures it supported, because some government expenditures did indeed grow the economy. A true corrective would be to insure that whatever percentage of the Treasury's intake came from the Trust Fund, at least that much of government expenditure must be of a character to grow the economy by the time the Social Security obligations would fall due. That was the genesis of the proposal I am leading up to.
Meanwhile, many Republicans and a few Democrats have proposed privatization as one answer to the Social Security crisis. Under the most market-oriented version, people during their working years would retain some control over the funds taxed from them for Social Security. They could invest it in whatever stocks or bonds they judged best -- subject, perhaps, to some limitations for the sake of safety. Another version, more popular among those who distrust the financial acumen of the masses, would have the government invest the whole bundle in the private sector on behalf of the insurees. That latter version is dead on arrival, because partisans of the private sector would rather muddle on with the present system than hand the government that much control of the private sector, while partisans of the government sector are unenthusiastic about pumping money into the private sector at all.
As for those more partial to the government, including most Democrats, some simply deny the arithmetic, or belittle the hardship of additional taxes. The current mainstream, though, has conceded the desirability of investing the Social Security surplus (not the whole intake), while retaining the basic design of the system. And it has discovered an investment more to its liking than private-sector stocks and bonds: paying down the national debt. To consider this proposal, we need a diagram which is more quantitative than our previous figures:
All of the upward arrows in this diagram are drawn to scale, from the actual figures for the government's fiscal year 1999. [1] Disregard heights, the scaling is in the widths. The magnitudes can be judged from the bottom three layers of the national debt, each of which is a trillion dollars wide. The "national debt" shown here means debt held directly by the public, as opposed to debt held by the Social Security Trust Fund and by some other trust funds which I haven't shown.
A noteworthy feature of the picture is that in 1999, for the first time in many years, there was some green ink. The government actually did retire some public debt. Note, too, that while the reduction of public debt fell short of the addition to the Social Security Trust Fund, it didn't fall radically short. The Administration's proposal for Social Security reform comes close to what it did anyhow in 1999. The only difference would be a formal sequestering of Trust Fund money for that purpose, and a promise to keep doing it.
Retiring public debt may be a good idea in its own right, but retiring it out of the Social Security surplus does no more than substitute quasi-obligations for firm ones. Every dollar of the Social Security intake which is placed in the Social Security Trust Fund purchases -- guess what? -- government bonds. If the Treasury uses the money which it has borrowed from the Trust Fund to pay off other creditors, that's more prudent than borrowing from the Fund and borrowing from the public as well (as it has been doing in previous years), but it's not the same as retiring the national debt. That part of it which is held by the Trust Fund continues to grow.
What's more, the Trustees of the Trust Fund, looking ahead with the benefit of expert actuaries, have predicted that the return on the fund plus payroll taxes will cease to cover Social Security benefits when the baby boomers retire. By 2019, they calculated just a few years ago, they would have to dip into principal, and by 2029 the fund would be empty. That date has now been set back a number of years, and everybody heaves a sigh of relief. Just the same, a day of reckoning will come, and its existence implies that Social Security is undertaking unwritten obligations which are not covered by the fund. In other words, there's an unacknowledged national debt in addition to that which is covered by pieces of paper.
Yet none of the proposed fixes to Social Security has touched upon the point which I would like to make. Namely, the private sector has no monopoly on investment-like activities. Going back to basics, an "investment", from the standpoint of real impact upon the over-all economy, becomes an investment only when it becomes an expenditure upon appropriate goods and services. All that passing of paper and electronic cyphers among lenders and borrowers, the formal ritual of depositing money in the bank, the exchange of ownership titles in Wall Street, the redirection of insurance premiums into long-term loans -- all of that is merely investment foreplay. (And yes, some people like it so well that they never get any further.) To repeat: from the standpoint of real impact upon the overall economy, an "investment" becomes an investment only when it becomes an expenditure upon appropriate goods and services.
"Appropriate goods and services", eligible to be called an investment, are those which are valued not for furnishing immediate gratification, but for what they will to do maintain and increase the output of value in the future. Think of a large ocean liner under construction. Efforts and resources that could be used to generate automobiles and groceries much more quickly are tied up in an object that won't be of any use to anybody until the day it is launched. Its value when it does come into use had better warrant the postponement. That is the quintessential example of an investment.
On this definition, many things done by the government have an investment-like character. (Does anyone detect by now how the discussion is converging upon space development?) It is perfectly legitimate that taxes which are collected to support a long-range, future obligation should be spent upon investment-like activities, whether public or private. More than legitimate, in fact: it is morally demanded.
So now, with a very broad brush, let me sketch a real Social Security reform. (These are just words, but they are important words, calling attention to what we'd like to do in principle.) Envision a new system. As in privatization, the full intake from Social Security taxes is directed into investment, but at least part of it goes into government expenditures which are identified as investment-like in character. How much to the private sector and how much to the government? Let's leave that discussion for another day. My preferences would include some privatization, but the handling of the government part is what requires innovation, so let's focus on that.
To get going, assume a future history. For a number of years, Social Security intake has been funneled into investment-like government expenditures, earmarked as Social Security investments:
Their performance has subsequently been monitored, and a dollar value has been placed upon their year-to-year contribution to the economy. This amount of the government's general revenue (as opposed to payroll taxes) now belongs to Social Security, and is paid out in benefits or reinvested. Voila! We have our investment-based system.
This is rather abrupt. Study the figure again, and ponder some implications. All of the Social Security taxes go into investment-like government expenditures. [2] Part of general revenue is attributed to the results of such expenditures made in the past, and is used to pay Social Security benefits, or is rolled over into further investment. Obviously, the identification of eligible government expenditures requires some serious thought, and massive innovations in accounting would be needed to quantify the results and earmark the resulting revenue.
Switching to an investment-based system raises a transition question: how do we get from here to there? Our "future history" assumes the existence of "investment-attributable" government revenue to cover current benefits. But what about here and now? When at first we start plowing the intake from Social Security taxes into investments for the future, how do we pay the benefits we've already promised to current retirees? Advocates of privatization tend to look unhappy at this point and talk about some tight years and the need for sacrifice all around. But there's a more graceful alternative under the scheme which I propose. After all, investment-like government expenditures have been going on for a long time. We just didn't count them as such.
So let's do retrospectively the accounting job which we assumed in our future history. We can retrospectively place an appropriate value upon past government investments, and attribute an appropriate part of today's general revenues to the return upon those investments. That part of general revenue is then available at once to pay current Social Security benefits, while current Social Security intake replaces general revenue in the support of ongoing or new investment-like government expenditures. This switch of accounting conventions readily lends itself to a gradual phase-in, as we start identifying eligible expenditures and quantifying their results.
Yes, it gives an impression of a shell game, but it's not really. It's simply a correction of our past accounting. We've wrongly treated the entirety of our government expenditures as current consumption, failing to distinguish the parts of it which are a vital investment for the future. In passing, we have undervalued some types of government expenditure, while overvaluing others.
Placing the Social Security system upon an investment basis, directing its intake to appropriate parts of government expenditure, selected for their investment-like character, will improve our discussion of the national budget. It will give more weight to those expenditures whose benefits accrue in the future, and which thus make rational provision for the obligations undertaken by Social Security. Even the most anxious advocates of "our needs here on Earth" (usually a codeword for "our immediate needs here on Earth") must recognize that their constituencies will age, and will still have needs in the future.
And that leads us back to the topic of our conference: space development. There are a number of traditional government activities which can be regarded as investment-like, because their reward lies wholly or partly in the future: education, research, public health, defense, and the opening of new geographical domains. That last, of course, is where we come in. We're striving for an investment whose return is, literally, the universe, or at least a stupendous enlargment of our and humanity's geographical domain. More prosaically, nobody can reasonably deny that much of the buoyancy of the current economy owes itself to four decades of development in space. Much greater rewards are easy to foresee -- but not everyone is looking in that direction.
I would love to see the day when advocacy groups for the poor, for the elderly, for minorities, for labor -- for whomever -- are protective of investment in space, because they count it as part of their own prospects for the future. Casting it as a source of future Social Security benefits would work to that effect.
I'll part with this thought: you don't have to be a rocket scientist to contribute to the opening of the space frontier. What rocket scientists get to do with their rocket science depends critically upon public perceptions of long-range versus short-term values, especially those generated by the public sector. Those generated by the public sector are difficult to compare head-to-head and present-value-for-present-value with those generated by the private sector. Yet they have to be compared if we're to make sensible public and private decisions. This is a job, in considerable part, for economists, accountants, and financial experts. If you're one of these, or in training to be one of these, you may yet become a hero of the space frontier.
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