Great Leap Forward


(See the two notes at the bottom.)

Back in January 2005, when President Bush was ramping up his attack on Social Security, Peter Wehner, a White House political strategist, wrote in a memorandum to conservative groups: “We need to establish in the public mind a key fiscal fact: right now we are on an unsustainable course. The reality needs to be seared into the public consciousness.”

Bush desperately wanted to privatize Social Security—to send the hundreds of billions of dollars to Wall Street so that the geniuses who manage money could blow the whole wad on their speculative schemes. Just imagine how that would have worked out! The already bubbling real estate and commodity markets could have reached an even more stupendous peak before crashing into what presumably would have been an even worse Global Financial Collapse. And today’s seniors would be dumpster diving without Social Security to fall back on.

Bush lost that squirmish but he won the war. Now even the “friends” of Social Security have the program’s unsustainability seared into their consciousness. The program is broke, bust, bankrupt. If you are young, you’ll never collect a dime from the program. But is there any truth to the rumor? Of course not.

Here’s the problem, according to our entitlement hysterians: the program promises far more than we can deliver. Our future workers will never be able to produce enough to keep retired baby-boomers fed, housed, and clothed. It is a simple “fiscal fact” that there will be too many old folks relative to those of working age. Uncle Sam will go broke trying to overcome that by cutting checks that are much too generous relative to the ability of future workers to cover the bill.

In this piece I want to separate the “financial support” from the “real support”. As readers of this blog know, I reject any notion that Uncle Sam can run out of money. And in any case, tomorrow’s retirees want to consume real stuff, not paper currency or electronic entries in balance sheets. So forget the arguments about bankrupting Uncle Sam, and let us focus on the capacity of our future economy to support all Americans, young and old.

To rephrase Bruce Springsteen: Can We Take Care Of Our Own?

Certainly we are aging—individually and collectively, nationally and globally. An aging population results from the twin demographic forces of fewer children per family and longer lives. Most experts recognize the burden that aging causes as the number of retirees supported by each worker rises. This trend is reinforced by the graying of the baby-boom generation, but burdens might continue to rise even after the boomers are buried.

The rising “real burden” is most directly highlighted by noting that the ratio of workers to retirees will fall from three to two during the next 75 years. Offsetting that is the expectation that workers in the future will be more productive.

A useful way to measure the burden of Social Security on our productive economy is to look at the ratio of the program’s spending relative to GDP. On current projections made in the 2012 annual report of Social Security’s Trustees, that ratio is expected to rise from the current 5% of GDP to 6.4% in 2035 (with retirement of all the baby-boomers already completed). After that the ratio actually falls to about 6% and remains there through 2086—as far out as the Trustees care to project.

So, relative to GDP, the burden rises by just under 1.5%, max. Does that sound like an insurmountable burden? Just for reference, it rose by nearly double that since the baby-boomers were kids. We handled it. Without hysteria. But Pete Peterson didn’t have his billions of dollars yet to try to fry the public’s brain.

Obviously, projections covering a period as long as 75 years (the long-range period used by Social Security’s trustees)—let alone projections through eternity as Pete Peterson and other enemies of Social Security love to do—are of necessity quite uncertain.

These forecasts require assumptions about future fertility rates, longevity, inflation, interest rates, labor productivity, GDP and wage growth, immigration, disability rates, labor force participation and unemployment rates, and so on.

As only one example of the difficulties involved, who would have imagined back in the early 1960s—when the typical family had 3.7 children and demographic experts worried about the “population bomb”—that by 2006 birthrates among native-born females would fall to about two, so low that we would have to rely on immigration (and higher birthrates among immigrants) to avoid a shrinking population? How many kids will the typical household have in 2086? What will the labor force participation rate of married women be in the 2060s? Will the rate of productivity growth in the 2070s be higher or lower than it was in the 1970s? No honest economist would pretend to know the answers.

Of course, honest economists are hard to find in Washington think tanks—which promote policy changes based on precise and dire predictions of program revenues and costs centuries into the future.

Back in 2006 I asked one of the foremost proponents of the use of infinite-horizon calculations to assess Social Security’s “sustainability” to leave to the side all of these uncertainties. I suggested that he imagine he had received divine confirmation that all of the “intermediate cost” assumptions used by the Social Security trustees in their long-range, 75-year projections will turn out to be accurate. Is there anything we might do today, I asked, that would reduce the real burden of supporting retirees in the year 2086?

After a thoughtful silence, he provided an impeccably reasoned, two-word, response: “more capital.”

To an economist, this means a combination of more human capital (education and training), more public capital (infrastructure such as roads, public buildings, and airports), and more private capital (productive plant and equipment, farms, telecommunications infrastructure, etc.). Of course, no economist could disagree: more capital would mean greater productive capacity available to reduce the burden of providing for tomorrow’s elders.

But is it that simple?

Let’s look at three types of capital investments that might be made to prepare for bigger burdens tomorrow.

1. Human Capital

No one doubts that the United States would reap current and future benefits from improvements to our educational system, which is presumably the main source of improvements to human capital. While our universities are widely considered to be the best in the world, and while the percent of our population that has attended at least two years of college is rising inexorably, experts concede that large segments of our population are inadequately educated for our current economy—much less for the economy of the future.

High school dropout rates remain high, dooming too many young people to sporadic work in low-paying jobs—or worse, to life on the margins of society, often under the control of the criminal justice system.

The problem is that while there are innumerable proposals to enhance education and training, we are far from consensus on what works: More money? Stay-in-school programs? No Child Left Behind? More testing? Less testing? School vouchers? Integration? Community-based schools? Magnet schools? Afrocentric education?

While we can agree that “more human capital”will reduce future burdens of aging, that statement tells us nothing about which policy initiatives will bring about the desired result.

More fundamentally, let us suppose that we did not have an aging society—that the age distribution would not change, or that the nation actually would become younger. Would we then oppose “more human capital”?

Of course we would not. We need a more productive labor force today and into the future—whether we have more elderly people to support or not.

Hence, even if we knew that the projections of the trustees would turn out to be correct, it is hard to see why that should change the level of human capital desired. The only difference that such divine confirmation would make is with regard to the type of human capital developed.

For example, an aging society will presumably require more health care (specifically, more eldercare) workers. However, we do not need to know the age distribution of the population in 2086, or even in 2041, to realize that policy needs to encourage human capital investment in these areas. We already have critical shortages of such workers, which are only partially relieved through immigration.

It is obvious to everyone outside the Washington Beltway that current policy in this area is woefully inadequate—irrespective of distant demographic trends. But here’s the thing.

How are we preparing for the future? We are slashing spending on education because Pete Peterson’s flunkies claim Uncle Sam is broke.

2. Public Infrastructure Investment

Public infrastructure can increase the quality of life and reduce the burden on future workers by enhancing private sector productivity. Further, at least some types of public infrastructure are exceedingly long-lived. With proper maintenance, dams, highways, levees, bridges, water delivery systems, and waste management systems can remain serviceable for half a century or more.

Thus, “more public infrastructure” certainly appears to be good advice for an aging society. To be sure, there is some uncertainty involved in projecting infrastructure needs for the far distant future.

Will workers and seniors in 2086 still rely on individual internal combustion–propelled transportation devices that ride on rubber in contact with asphalt, or will we be jetting about in our own individual Jetson flying cars? Will the greatest need for expansion of water treatment facilities over the next 75 years occur in North Dakota or in Rhode Island? Assuming we will need new bridges in Florida to handle traffic flows in 2060, do we begin now, or wait until 2055?

Moreover, if the population were not aging, would we forgo increased public infrastructure investment? Again, no one would (or, at least, should) adopt that line of argument.

As with the case of human capital, the aging of society doesn’t change the need for more public investment, although aging changes the nature of the needed infrastructure. We need more senior housing, more long-term care facilities, and more senior citizen recreational centers—just to take care of today’s seniors.

These types of public investments can be rather long-lived. Further, some of the existing capital stock (hospitals, apartment buildings, schools) can be renovated as needed to accommodate growing numbers of seniors.

Hence, it makes sense to increase the supply of infrastructure that serves elders through new construction as well as rehabilitation of existing facilities. And the time to begin is now.

Again, we don’t need high-powered think tanks to tell us that public investment in infrastructure construction and maintenance has been inadequate for the past three or four decades—whether we are aging or not. Just ask the victims of hurricanes Katrina and Rita.

The American Society of Civil Engineers provides an annual estimate of the infrastructure deficit, which now amounts to about $2 trillion and climbing. My own crude estimate of the discounted value of that deficit from now until the sweet hereafter amounts to a gazillion dollars.

It is truly amazing that Social Security “reformers” (AKA “enemies”) have spent so much time calculating the supposed infinite-horizon financial shortfall of that program (which currently runs huge fiscal surpluses), while ignoring the very real, obvious, and current infrastructure deficit that burdens everyone today.

And so how are we preparing for future burdens? By cutting spending on public infrastructure because Pete Peterson’s flunkies claim Uncle Sam is broke.

3. Private Investment

Finally, we turn to private investment in plant, equipment, provision of services, and farming. Forty years ago, economists liked to pretend that investment was like “putty”—highly pliable, so that it could be adapted to any technology and produce any type of output. In truth, most private capital is fairly inflexible in both respects: hard to upgrade and designed to produce specific products or services. The longer the horizon, the more difficult it becomes to adapt plant and equipment to new technologies and new products.

Thus, even if capital put in place today could continue to produce output over the next 75 years, it is highly unlikely that it would be appropriate to our needs at that time.

Many of the problems I raised with regard to investing in public infrastructure today for the elderly persons of 2086 apply with much greater force to private investment. Further, private investment is undertaken with a view to making a profit.

Government could conceivably build a dam today that will not be needed until 2025. No private firm would build plant and equipment today on the expectation that it will find a demand for its output in 2025—let alone 2086. Hence, even if we removed all uncertainty over future technologies and baskets of goods consumers will demand, firms will not invest today to meet demand by seniors even a few years down the road.

The problem, then, is not simply uncertainty about the future, or even the problem of finite lives of capital goods. “More capital” cannot be a recommended solution to far distant burdens, because firms will invest more today only if demand for the relevant products is forthcoming today (or in the very near future).

The benefits of increasing private investment, and thus raising productive capacity, are no less obvious than recommendations to increase human capital and public infrastructure.

But, again, it is easy to support this course of action even if the society were not aging.

And, again, it is very difficult to come up with actual private investment projects that will reduce the burden on workers of supporting retirees 50 or 75 years into the future. Certainly we will need greater production of pharmaceutical products, wheelchairs and other mobility devices, private eldercare facilities, aged-friendly vehicles, and so on. Indeed, we need that today.

What is holding back private investment is—mostly—insufficient demand today for such products, which is due, at least in part, to insufficient income of today’s seniors. Nor is it the business of business to plan for demographic events that might occur in a half century.

If any institution ought to plan that far ahead, it should be the federal government.

The favored solution to insufficient private investment is “more saving.” Indeed, many of the proposed “reforms” to Social Security include some sort of tax incentive scheme to promote more saving. If we lived in an economy that suffered from chronic supply constraints—say, the Soviet Union before its breakup—this might make some sense. We would want to encourage consumers to reduce their spending, thus freeing up resources that could be redirected by economic planners to produce investment goods that would lead to increased production of products needed by our aging population.

But the United States is not the USSR! Investment in the private production of products for today’s, and tomorrow’s, seniors is rarely—if ever—restrained by inability to purchase resources, including labor. What constrains investment is demand for the output that will be produced by the new private capital as soon as it comes on line.

I think, of course that these conventional arguments are completely wrong—they involve the fallacy of Keynes’s paradox of thrift. However, even according to the conventional estimates made by advocates of tax-advantaged savings plans, the effects of such schemes on savings, investment, and growth are too small to make much difference.

Inasmuch as today’s investment has to be related to perceived demand for output either today or in the very near future, we are left with the conclusion that any proposal to resolve future burdens of aging through “more saving” will at best amount to little.

And how are we preparing for the future? By keeping 25 million workers from obtaining full-time work, and keeping our nation’s factories operating below capacity because sales are too low to justify hiring and investing. Why? Because Pete Peterson’s flunkies oppose fiscal stimulus on the argument that Uncle Sam is broke.


Ironically, the economist who recommended “more capital” as the solution to the rising burden of caring for the elderly also argued that faster economic growth would worsen the Social Security crisis! His analysis was complex, rigorous, and correct—on its own terms. But it was nonsense.

To put it simply, given low birth rates, rising longevity, and the way that Social Security benefits are calculated (based on earnings), the discounted financial gap between total benefits paid out and payroll tax revenues received, calculated over an infinite horizon, will be higher if GDP and wages grow faster.

This conflict between his intuition that more capital (and hence more real output) would reduce future burdens and the results from his infinite-horizon model, which implied that more growth makes things worse, should have led him to drop the model in favor of common sense.

What matters is the real burden, not any “financial burden” implied by “actuarial gaps.” But common sense can be a scarce resource among economists.

Above I pointed out that the projected increase of the real burden resulting from aging is far too small to mount a serious challenge to our nation’s ability to produce enough output so that workers, retirees, and other dependents will have a significant and steady increase of real living standards.

The number of workers per retiree falls from three to two; however, worker productivity will quadruple over the same period. Further, workers will have fewer children to support, so that the total dependency ratio (elderly plus young relative to working-age populations) will rise only to the level we achieved in the mid-1960s.

In this blog, I have sought only to answer a seemingly simple question: given that the real burden will rise, is there anything we can begin to do today to attenuate that increase?

The answer seems to be that we should essentially follow the same policy prescriptions that would make sense even if our society were not aging: 1) more human capital: more years of schooling, fewer dropouts, higher quality schooling, and enhanced apprenticeship and training programs; 2) more public investment: new and improved public infrastructure, better maintenance of existing infrastructure, and reduction of adverse environmental impacts; and 3) more private investment: new and improved private production facilities to enhance growth.

The last item will almost certainly require maintenance of high aggregate demand today and over the future.

All of this is quite sensible, although it bears no relation to the ongoing debate in Washington about “reforming” Social Security. That misguided debate focuses almost exclusively on the “financing gap” and on “financial fixes”—such as tax increases or “entitlement” cuts that would hurt demand and employment.

In truth, if there really were a looming crisis in Social Security’s future, any financial fixes would amount to nothing more than rearranging deck chairs on the Titanic, unless they reduce future real burdens. However, no one has made a strong case that financial fixes can reduce future real burdens.

To do so they would have to reduce the number of future elders, increase the number of future workers, or increase the productivity of future workers. I have seen no argument that proposed reforms would shorten the lives of tomorrow’s seniors, nor that they would increase birthrates—indeed, most policymakers would reject out of hand any proposals to accomplish either of these outcomes.

Hence, all reforms must be geared toward increasing productivity, which comes down to encouraging more capital formation.

Yet, as I have argued here, that advice provides virtually no useful guidance to policymakers. Further, the types of investments that can be made today to reduce burdens in the distant future are in human capital and public infrastructure. That is to say, the investments must be undertaken primarily by government.

Yet the reformers seek to reduce the role of government and increase reliance on the market—which by its very nature is focused on the here and now, not on infinite horizons.

To move forward in the discussion about aging, in general, or Social Security, in particular, each reformer should be forced to outline in detail how his or her proposals will generate “more capital” specifically suited to the projected needs in 2051, 2086 and beyond. Any reform that fails to provide specifics should be dismissed as “much ado about nothing.”

To be sure, we can expect our society to continue to age, and that will mean fewer workers per retiree. Although it amounts to “something,” the rise of real burdens is small given projected productivity increases, and there isn’t a lot that can be done, or needs to be done, in the foreseeable future.

*1. This is an update of an earlier piece I wrote, here:

*2. My colleague Ed Dolan has written a blog related to the theme of sustainability of US government deficits and debts. I will get to a response when I have some free time.


Neil WilsonFebruary 5th, 2013 at 8:08 am

"How many kids will the typical household have in 2086?"

That depends upon whether society generates something else for them to do.

Opportunity is the best contraceptive and at the moment we're going backward on that one.

L. Randall Wray L. Randall WrayFebruary 5th, 2013 at 12:50 pm

Neil: I think the evidence shows that the most important factor is status of women. Rising status is the best birth control.

Edward StevensFebruary 5th, 2013 at 12:55 pm

"…send hundreds of billions to Wall Street": for the record, the money would go to buy stocks of companies and bonds of companies that are not on Wall Street. Private pension funds are the largest holders of stock in US companies.
The average commision paid by institutional investors like mutual funds and pension funds is somthing like 3 cents per share. Bonds the spread is about 1/16 of a point.
Second, all anyone has to do is look at Canadian and Australian public pensions funds to see that US workers could ahve done a lot better tha taking an IOU from the US Treasury– The fear and hate engendered by people like the author are sad to see– I do agree that extreme wealth is morally far from ideal– but envy and greed remain deadly sins.
PS: the Canadian public pension fund currently borrows USD7b from US investors to invest in such things as US real estate and private equity–it can be done successfully–just ask Canada. It's not hard if you have the will.

SchofieldFebruary 5th, 2013 at 7:32 pm

If you want to understand why the kleptocracy wants us to believe the money's going to run out for social security look no further than the message at the bottom of this on-line advertisement for seniors to withdraw equity from their homes:-

Wall Street's Vampire Squid coming to visit seniors living near you!

ThomasGrennesFebruary 5th, 2013 at 10:37 pm

Governments can raise taxes (including the inflation tax) to finance the unfunded portion of social security, but there is resistance to higher taxes. Jonathan Ostry and various co-authors have attempted to measure the capacity of governments to raise taxes by estimating "fiscal space". Every government, including the current U.S. government is aware of this resistance. Also there has been a substantial change in the composition of government spending in recent years (see Gerald Seib in today's Wall Street Journal). The percentage of the budget spent on social security, medicare, medicaid and other entitlements has increased, and the share spent on discretionary items has decreased.
Discretionary items include government investment in education, R&D, and infrastructure. Thus, resistance to higher taxes combined with increased spending on social security and other entitlements may be crowding out some of the most productive
forms of government spending.

lrwrayFebruary 5th, 2013 at 10:40 pm

Uhhhmmmm: could it be Blackrock products? Is Pete Peterson handling their funds? Enquiring minds want to know.

L. Randall Wray L. Randall WrayFebruary 5th, 2013 at 10:43 pm

Hold on there Edward. This is a moderated blog, and all comments go through a moderator so it takes a bit of time to approve. We censor personal attacks and other Troll-like behavior. We decided to let your personal attacks go through, however. Question: so just what is your classification scheme for liberal vs conservative? A liberal doesn’t censor personal attacks while a conservative would do so?
Oh, and does your employer approve of use of the workplace email system for such comments? Just asking.

lrwrayFebruary 5th, 2013 at 10:58 pm

Thomas: So what? Taxes don't pay for nothin'. As anyone who reads my blog knows. Abolish the payroll tax, don't raise it!

On composition of govt spending: I'd create jobs and reduce other spending. But your use of the "entitlements" term means either you've bought the neolib line or have not listened to Bruce. We take care of our own. It is the right thing to do.

jonf34February 5th, 2013 at 11:32 pm

Why should the government underwrite Wall Street investments in SS? Makes zero sense to me. Busted. And you know it will happen again. Let private pension plans do as they like. But why also do we need to collect payroll taxes in the first place?

jonf34February 5th, 2013 at 11:38 pm

Do you have some problem about spending for all of it? Raise taxes on the top one percent and increase capital gains if you like. If not, just spend the money. It's as free as it can get since it comes from thin air.

ThomasGrennesFebruary 6th, 2013 at 2:38 am

If taxes serve no useful function, why not abolish all taxes, not just the payroll tax? How
would the government get money to give to Social Security recipients? Printing money?
If injections of new money create inflation, isn't this a tax on holders of money. In absence of taxes of some form (including "in kind" taxes), how do governments redistribute income toward their own kind?

L. Randall Wray L. Randall WrayFebruary 6th, 2013 at 12:49 pm

Thomas: OMG as my kids say. This is the problem when someone comes along and has not read what comes before. Answers to all your questions can be found in previous posts. Sovereign govt does not (cannot) spend the taxes you pay. It must spend first before you can pay. All elementary economics.

ThomasGrennesFebruary 7th, 2013 at 2:12 am

Pardon me. My background may be too narrow for this discussion. According to the economic principles I am familiar with, all economic agents (including governments) face budget constraints. Also all economic actions, such as spending an additional dollar on social security benefits, are subject to costs equal to the next best alternative foregone. This is the world in which the U.S. Congress, the President, and current and prospective Social Security beneficiaries reside.

GuestFebruary 7th, 2013 at 10:50 am

I would be interested in a similar analysis of Medicare/Medicaid. Isn't that the category of government spending that is growing unsustainably?

LRWrayFebruary 8th, 2013 at 3:44 am

Thomas I'd rephrase your last sentence. This is the imaginary world in which the Congress and President reside. Issuers are not like users of the currency.

Try it yourself at home. Tax your kids, issue your IOUs so they can pay the taxes. Run the experiment and report back to us.

SF12February 8th, 2013 at 3:45 pm

Dr. Wray,
"On current projections made in the 2012 annual report of Social Security’s Trustees, that ratio is expected to rise from the current 5% of GDP to 6.4% in 2035 (with retirement of all the baby-boomers already completed). After that the ratio actually falls to about 6% and remains there through 2086—as far out as the Trustees care to project.

So, relative to GDP, the burden rises by just under 1.5%, max. Does that sound like an insurmountable burden? "

You have made the % vs percentage points error. The actual % increase is 28% [= 1.4/5].

I think that the English language should be use correctly (always) to facilitate communication. Sloppy English leads to miscommunication. Esp. in the long run.

SF12February 8th, 2013 at 3:51 pm

"how do governments redistribute income toward their own kind? "

To me this sentence makes no sense. What 'kind' does the Gov. want to redistribute income toward? What is the 'own kind' of a Gov.?

CalgacusFebruary 9th, 2013 at 5:06 am

SF12: There is no error or sloppiness. You are missing the "relative to GDP" in the clause you quoted.

Relative to GDP is the sensible measure. Measuring the relative increase in the burden is pretty silly. It is like saying that a 200 pound person who is used to carrying 10 pounds in his backpack will collapse if he has to carry 13 pounds because the burden has increased by 30%.

JG refers to the Job Guarantee.

SteveFebruary 12th, 2013 at 2:56 pm

impose a new tax on oil consumption. dedicate revenues to the social security trust fund. use those revenues to invest in revenue-generating infrastructure assets. This will:
decrease dependency on foreign oil & alleviate climate change
fund social security
improve infrastructure
The one thing it won't do is encourage American families to have more children. To do that we need to bring down the cost of college.

L. Randall Wray L. Randall WrayFebruary 12th, 2013 at 5:56 pm

Tax “bads” such as oil consumption.
But taxes don’t, won’t, cannot “pay for” Social Security. Don’t link the two. Taxing a bad is by design supposed to reduce and then eliminate bad behavior. You want to tie SocSec to oil, which we will stop using? Bad idea.

SteveFebruary 13th, 2013 at 3:13 am

Thanks for your thoughtful response, Randall. I'm not sure your analysis account of the strong possibility that the social security problem is temporary. Insofar as timing is the issue, a financial solution might be helpful. The baby boomers will be gone by 2045 and the demographic problems will be quite different at that point. We need to fund the 38 years between 2011 (1946+65) and 2049 (1964+85) during which the baby boomers' old age will put demographic stress on the social security system. My proposal will put appropriately long-lived revenue-producing assets into the fund that will simultaneously solve other problems of our era: lousy infrastructure and excessive burning of fossil fuels.

Another issue I'm addressing is frustration with the FICA tax. When job growth is poor and wages are low, does it make sense to tax wage payments?

L. Randall Wray L. Randall WrayFebruary 13th, 2013 at 1:03 pm

Uncle Sam does not need a cookie jar. Relative to GDP, babyboom retirements are a minor blip in real terms, and our Uncle in Washington can handle the keystrokes to financialize the shift of resources needed.

Agree we don’t need no stinking payroll taxes. Abolish them.

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