Can the Social Security Trust Fund Contribute to Savings?

Author(s): L. Randall Wray

Source: Journal of Post Keynesian Economics, Vol. 13, No. 2 (Winter, 1990-1991), pp. 155-
170
Published by: Taylor & Francis, Ltd.
Stable URL: http://www.jstor.org/stable/4538230
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Mini-Symposium: Social Security, taxes,
and national savings

Can the Social Security trust fund

contribute to savings?

L. RANDALL WRAY

Introduction

A recent spate of books and articles on the low savings rate in the United
States has been published, blaming this lack of saving for current
economic ills and predicting coming disaster unless we begin to save
more.' The apocalypse is forecast to occur when the "baby boom"
retires, if not sooner. The Brookings Institution has published a plan for
increasing aggregate saving through the accumulation of surpluses in
the Social Security program, which will lead to a large trust fund to

The author is Assistant Professor at the University of Denver. He would like to thank
Professors Tom Asimakopulos and Paul Davidson for comments, without implicating
them in the final results.

1 For example, see the March/April, July/August, and September/October 1989 is-
sues of Challenge for discussions of the "saving shortfall." For orthodox perspec-
tives on saving, see Adams and Wachter (1986), Bertocchi (1989), Carroll and
Summers (1987), Hendershott (1985), Lipsey and Kravis (1987), and Summers and
Carroll (1987). For analyses of Social Security, see Aaron et al. (1989), As-
imakopulos (1989), Ferrara (1982), Hubbard (1983), and Wise (1985). While Aaron
et al., argue that the current Social Security system can be made fmancially sound by
raising payroll tax rates, Ferrara argues that the system should be replaced by a pri-
vate system that would be more equitable and financially prudent. Each analysis
claims that its proposed reforms would increase the national saving rate. For discus-
sions of the relation between government deficits and saving, see Barro (1974),
Bertocchi (1989), Penner (1983), and Poterba and Summers (1987). For analyses of
problems of measurement of savings, see Hendershott (1985) and Lipsey and Tice
(1989). For a Post Keynesian critique of orthodox views of savings, see Davidson
(1988). Davidson shows that the Kennedy-Johnson years were associated with high
government spending, rapid economic growth, and high savings. He argues that,
rather than trying to increase savings, policy should increase the level of effective de-
mand sufficiently to operate the economy at full capacity.

Journal of Post Keynesian Economics ! Winter 1990-91, Vol. 13, No. 2 155

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1S6 JOURNAL OF POST KEYNESIAN ECONOMICS

provide for future retirees.2 This can be accomplished, it is claimed,

if the Social Security surplus is not used to offset deficits in the r
the federal budget.
According to current orthodoxy, the Social Security surplus adds to
national saving, while the government deficit reduces aggregate saving.
It is feared that politicians are trying to use Social Security suTpluses to
subvert the mandates of the Balanced Budget Act of 1985, which
requires that the federal govenmment reduce deficits. It is claimed that if
the surpluses are used in this manner, then Social Secunrty will not be
able to provide the real benefits promised for future retirees.
In a recent article, Professor Asimakopulos argued that the nrsing
Social Security trust fund "does not, by itself, ensure that the current
generations of workers will have paid any portion of their own future
public pensions" (1989, p. 655). The future impact of the trust fund
depends upon the use made of it today. If the fund is used to increase
current government spending, this leads to greater current income and
may benefit future generations if the incremental govenmuent spending
generates additional productive capacity, either directly by adding to the
social infrastructure, or indirectly by stimulating additional investment
by entrepreneurs. If the fund is used to decrease taxes, current disposable
income is increased, thereby stimulating additional consumption, and,
to the extent that this puts pressure on existing capacity, encourag'ing
expansion of productive facilities. Finally, the trust fund can be used to
reduce the govenmment's need for external borrowing to finance deficits
in the rest of the govemment's budget. That is, payroll taxes are used to
buy govenment bonds issued, so the govemment can spend in excess
of tax revenues in other areas.
Asimakopulos argues that this final case "lowers the cost to future
generations," because future taxes would not be required to finance
interest payments that would have been required if current government
borrowing had been higher (1989, p. 658). It is not clear what he had in
mind here. If the goverunent borrows more today, it is true that interest
payments on govemment bonds will be higher tomorrow; however,
these interest payments would be made to bond holders tomorrow.
Clearly, govenment interest payments cannot "burden" a generation,
since they merely transfer income from taxpayers to bondholders living
at the same time. However, if a substantial portion of government debt

2 See Aaron et al. (1989).

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 THE SOCIAL SECURrIY TRUST FUND AND SAVINGS 157

is held by foreigners, future interest payments represent a transfe

foreigners.3
In any case, taxing workers to build up a trust fund that is used to
finance government spending elsewhere during the same period is
clearly nothing more than an accounting device by which the govem-
ment keeps two books, such that the assets of one offset the liabilities
of the other. The government will make interest payments to the Social
Security trust fund rather than to the general public at large. It might as
well have reduced payroll taxes and increased non-payroll taxes to
finance a portion of its general expenditures.
The purpose of this note is to provide an answer to a fundamental
question: Is there any way in which current additions to a trust fund can
provide for future consumption? Indeed, can a more rapidly growing
trust fund increase saving (if no one elsewhere is dissaving more
rapidly)? While the answer is quite simply "No," this seems to have
been forgotten in much of the recent discussion of the Social Security
program, and of national savings, in general. As this note will make
clear, the only way to increase private saving or to generate a larger
Social Security trust fund is to increase aggregate spending via increased
aggregate deficit spending. Thus, rather than seeing the govemment
deficit as a drain on national savings, it must be seen as a source of
savings, including that associated with the Social Security surplus.

I. Can financial savings provide for future real consumption?

Revisions made in 1977 and 1983 fundamentally changed the Social

Security program from a pay-as-you-go system to one that will accu-
mulate vast financial reserves over the next four decades. As Table 1
shows, the various Social Security and Medicare programs tended to run
small surpluses until the mid 1970s, after which the Old Age and
Survivors Insurance (OASI) portion consistently ran deficits. By the mid
1980s, after the govemment increased revenues and cut expenditures,
OASI and the Hospital Insurance (HI) portion of Medicare began to run
large surpluses, accumulated in the fonn of government bonds. The
Social Security trust fund will reach approximately $320 billion by the
end of 1990, and will nearly double by 1993. The trust fund already
holds more than 20 percent of all federal debt outstanding, and at

3 I will discuss the impact of greater bond sales to foreigners below.

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158 JOURNAL OF POST KEYNESIAN ECONOMICS

Table 1

Social Security and Medicare surpluses ($ billions)

year OASI Di HI SMI total

1971 1.71 1.31 0.43 0.23 3.68

1972 2.07 0.98 -0.24 0.19 3.00
1973 0.02 0.48 1.51 0.27 2.27
1974 1.45 0.38 3.55 0.53 5.91
1975 2.08 -0.06 1.96 0.17 4.14
1976 -1.97 -1.25 0.97 -0.22 -2.47
1977 -1.68 -2.22 0.17 1.04 -2.69
1978 -4.39 0.13 0.68 1.70 -1.89
1979 -3.24 1.25 1.57 1.04 0.62
1980 -3.18 2.06 1.13 -0.47 -0.46
1981 -0.73 -4.29 3.60 -0.79 -2.21
1982 -11.30 3.36 2.75 2.07 -3.12
1983 -3.40 3.62 5.40 0.83 6.44
1984 0.91 -0.65 3.44 2.15 5.85
1985 10.67 -1.31 2.26 1.85 13.47
1986 16.80 -0.07 6.74 -1.21 22.26
1987 20.75 -1.18 11.93 -3.34 28.16
1988* 36.72 0.06 15.37 -0.03 52.12
1989* 44.23 0.91 19.65 2.88 67.67
1990* 54.16 4.12 20.11 1.65 80.03
1991 * 63.68 6.20 20.60 1.92 92.40
1992* 72.78 7.13 20.26 1.85 102.02
1993* 84.58 8.31 20.36 1.82 115.08

fund: 414.42 33.89 166.96 16.21 631.48

Notes: All data were obtained from Historical Tables, Budget of the United
States Government, 1989, Table 13.1. Projections are indicated by *. Fund
represents the total trust fund accumulated by 1993. OASI = Old Age and Sur-
vivors Insurance; Dl = Disability Insurance; Hi = Hospital Insurance; SMI=
Supplemental Medical Insurance; total= summation of columns 1-4.

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 THE SOCIAL SECURIY TRUST FUND AND SAVINGS 159

projected rates of growth, will own 98 percent of governmen

the year 2020, even if the rest of the federal govenment run
equal to 1.5 percent of GNP each year over the next three decades4
(Aaron et al., 1989, p. 100).
By the year 2020, the trust fund is predicted to reach $12.8 trillion, or
five times annual Social Security expenditures.5 Current projections
show that the program will run surpluses until 2030, after which deficits
will be incurred.
Demographic changes are the primary problem: rising longevity and
falling fertility rates mean that the ratio of those over 64 to those of
working age will double by the year 2060. The stated purpose of the
trust fund is to accumulate reserves now, which can be depleted in later
years when expenditures will exceed the revenues that can be generated
by a taxable base which will shrink in relative terms. In other words,
current " Isaving" is to provide for future "consumption. " The question
is: Can the current generation save in real tenrs for its future retirement?
If the current generation were to abstain from consumption, dig holes,
and bury goods and services to be used forty years hence, it could clearly
provide for its consumption when it retires (providing that there is little
deterioration of the inventory of underground goods). In this case, all
(real) income received by consumers is currently spent on (real) con-
sumption goods, but some portion of the purchased goods is "saved"
rather than "consumed." (Of course, "saving" as measured in the
National Income and Product Accounts would be zero, while measured
"consumption" would equal the total income received by consumers.)
If this is what is meant by saving, then there can be no quarrel with the
statement that we are not adequately providing for retirement, since this
sort of saving is primarily undertaken by only a handful of

4 What will the trust fund accumulate once it has purchased all the govemment
bonds?

5 According to Aaron et al. (1989, p. 115), a trust fund equal to twelve months of ex-
penditures is sufficient to get the Social Security program through a recession as se-
vere as that of 1973/74 without entailing fmancial crisis. By 1992, the trust fund will
reach that level. By 1997, the trust fund will be twice annual expenditures, which is
sufficient to meet any contingencies that would arise during back-to-back recessions.
Even if deficit spending by the government were impossible, it makes little sense to
accumulate a larger trust fund than what would be required to see the program
through a deep recession. Clearly, the only justification for larger surpluses must rest
on the assumption that these can somehow transfer purchasing power across time
from the present to the future.

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160 JOURNAL OF POST KEYNESIAN ECONOMICS

"survivalists" concentrated in the West. No other form of real sa

other than accumulating an inventory of currently produced du
goods will guarantee provision of consumption goods. Those of us
do not accumulate hoards of goods and services will be forced to
consume goods and services produced in the year 2030 when we retire.
Presumably, most of those who advocate more saving actually mean
to encourage spending on nonconsumables, that is, on investment goods,
with the hope (or expectation) that the production of such goods in-
creases productivity or capacity for future production. In this case,
measured saving will equal spending on investment. The question, then,
is: Will investment spending be encouraged by taxing the current
generation and building a large trust fund? If so, why? And how can a
trust fund be accumulated?
As spending determines income, and as taxes represent a leakage from
the circular flow of income, a trust fund can be accumulated only to the
extent that injections of deficit spending (i.e., negative savings) raise
income sufficiently to permit the leakages accumulated through payroll
taxes (without the system running down). As discussed below, these
injections must come primarily from deficit spending by the government
or by firms. If the deficit spending comes primarily from firms and leaks
into a trust fund that is growing because government spending falls short
of tax revenues, then finns will find that theirexpectations of profits have
not been realized, so they will reduce their deficit spending. Therefore,
in order to accumulate a Social Security trust fund, much of the respon-
sibility for injections will have to be placed on government deficit
spending elsewhere in the budget. It is senseless to blame the
government's deficit for lack of saving, for it is the government's deficit
on other portions of the budget that, when added to private investment
spending, generates sufficient injections to enable the Social Security
trust fund to accumulate a surplus.6 In the absence of the Social Security
surplus, the government's deficit would be more stimulative, and would
generate greater private real income and savings.
In reality, all retirement systems must be pay-as-you-go at the aggre-

6 Aaron et al. (1989) project rising Social Security surpluses and falling government
deficits in the rest of the federal budgeL Since rising Social Security surpluses can be
provided only through injections of deficit spending elsewhere, such projections ap-
pear to be inconsistent. As Social Security surpluses will reduce aggregate effective
demand, it is unlikely that investment can be the source of injections that make these
leakages possible. Thus, Social Security surpluses will primarily rely upon other gov-
ernment deficits for their generation.

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 THE SOCIAL SECURI7Y TRUST FUND AND SAVINGS 161

gate level. In a monetary economy, an individual can transfer puch

power across time from the present to the future by accumulat
monetary claims. As long as these monetary claims retain some
chasing power, the individual may redeem them later for future prod
tion. This, of course, is not true for society as a whole. In the aggrega
money is essentially a one-way time machine: it transfers purcha
power primarily from the future to the present. In each period, purc
ing power is detennined by newly-created credit money and by ne
releases of monetary hoards. Today's hoards of bank money, howe
could only have been generated by yesterday's deficit spending, fi-
nanced by expansion of bank balance sheets. In other words, today's
hoards representnothing more than yesterday's level ofunretired spend-
ing deficits-deficits incurred to transfer purchasing power from the
future to the present in hopes of later retiring debts.7
Society uses deficit spending, financed by money creation, to generate
purchasing power today by issuing promises to pay in the future.
Ignoring the caches of survivalists (and producers' shelf inventories),
production in each period exactly determines the quantity of goods
available for consumption in the same period. However, growth of total
production of investment and consumption goods requires that at least
some sectors are willing to incur deficits now (to purchase today's
produced goods) with the expectation of retiring this debt tomorrow as
tomorrow's citizens buy more goods than today's population. Until full
employment is reached, however, aggregate purchasing power in each
period is essentially whatever society as a whole wants it to be. By
transferring purchasing power from the future to the present (i.e., by
allowing spenders to borrow new money today, with the promise of
paying for the loan with tomorrow's sales receipts), society pennits
employment of productive resources at full capacity and induces new
production of additional capacity, even as this deficit spending generates
positive savings (leakages) in the system. In this way, the current
generation can leave a legacy of productive equipment to be used by
future generations to provide for retirees. It is by transferning purchasing
power from the future to the present-that is, by deficit spending-that
the current generation provides for its future retirement.
Indeed, an explicitly pay-as-you-go retirement system is the most
sensible approach in any economy that chronically operates below full

This is not strictly true of the government, which may never intend to repay the
debt represented by money-financed deficit spending.

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162 JOURNAL OF POST KEYNESIAN ECONOMICS

Table 2

National saving and investment

(percent of net national product)

year PS + NBS + FS + SLS =NS =NPI + NFI -SD

1987 2.6 2.0 -3.9 1.3 2.0 5.8 -4.0 -0.2

1986 3.2 2.8 -5.4 1.6 2.1 5.5 -3.8 -0.4
1985 3.5 2.9 -5.5 1.8 2.7 5.8 -3.2 -0.1
1984 4.9 2.8 -5.1 1.9 4.6 7.4 -2.7 -0.2
1983 4.3 2.2 -5.8 1.6 2.2 3.5 -1.1 -0.2
1982 5.5 0.7 -5.2 1.3 2.3 2.3 0.0 0.0
1981 5.9 1.6 -2.4 1.3 6.4 6.2 0.4 0.2
1980 5.6 1.6 -2.5 1.1 5.8 5.5 0.5 0.2
1979 5.3 2.8 -0.7 1.2 8.5 8.4 0.1 0.0
1978 5.5 3.4 -1.5 1.4 8.9 9.3 -0.5 -0.1
1977 5.1 3.5 -2.6 1.5 7.5 8.0 -0.5 0.0
1976 6.0 2.9 -3.3 0.9 6.5 6.1 0.5 0.2
1975 7.3 2.6 -4.8 0.3 5.3 4.0 1.5 0.2

Notes: All data are from Economic Report of the President January 1989.
PS = personal saving; NBS = business saving less capital consumption allow-
ance; FS = federal government surplus; SLS = state and local government
surplus; NS = national saving; NPI = private domestic investment less capital
consumption allowance; NFI = net foreign investment (net exports less net
transferstoforeigners and interest paid by government to foreigners); SD = sta-
tistical discrepancy. Columns 1-4 and 6-8 may not sum to column 5 due to
rounding error.

capacity utilization (of which the United States is a good example)

(Walker and Vatter, 1989). A trust fund lowers aggregate demand and
reduces the incentive to invest. As the goods that will be consumed in
the year 2030 must be produced (primarily) in that year, the burden of
providing these goods can be reduced if we increase productive capacity
between now and that date.8 Investment is encouraged through growth
of aggregate demand-primarily through additional government deficit
spending or more consumption. Clearly, accumulation of a Social

8 Again, some consumption might be out of individual hoards of goods and services,
such as those of the survivalists.

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 THE SOCIAL SECURJ7Y TRUST FUND AND SAVINGS 163

Security trust fund (which reduces consumption) cannot help. Pay

taxes are currently accumulated in the form of govemment bonds issu
as other government programs run deficits. When (and if) these are s
in the year 2030 to finance Social Security benefit payments of the
retirees, the govenment will have to tax, or borrow from, the workers
in that year in order to retire the bonds. However, a pay-as-you-go
system would require exactly the same action of taxing or borrowing
from workers to provide benefits to pensioners in the year 2030. The
only difference would be lower tax burdens today, and the resulting
higher effective demand today could provide greater incentive for
investnent and result in greater productive capacity for the future.

II. Savings and deficits

There is currently a great deal of discussion (bordering on hysteria)

concerning the " fall of the national savings rate." An exposition such
as that provided in Table 2 is used to demonstrate that the current
national saving rate is something like 2 percent of net national product
(NNP), and thatthis rate has fallen from about 8.4 percent ofNNP during
the 1960s (Aaron et al., 1989, p. 6).
According to this view, national savings is the sum of personal
savings, business savings, and the surplus of all levels of govenment,
minus the federal government's deficit on its programs excluding Soci
Security. Thus, the federal government deficit is seen as a deduction
from national savings and is blamed as the primary culprit in the fall of
savings. The federal govenment deficit is partially "offset" by a
surplus from the Social Secunrty and Medicare trust fund equal to about
$28 billion in 1987, or 0.7 percent of NNP (see Table 1). It is said that
without this trust fund, the federal govermnent deficit would represent
an even larger drain on national savings.
Of course, Table 2 represents an identity that, by itself, can tell us
nothing regarding causation. In orderto give it meaning, we must provide
a theory. As is well established, saving is a leakage from the circular flow
that can be generated only by injections. An attempt to increase savings
cannot lead to rising savings-only spending on categories other than
consumption can raise savings. A rearrangement of Table 2 consistent
with the leakages-injections approach provides Table 3.
Leakages are composed of net foreign savings (imports and transfers
less exports) and private savings, while injections are generated by

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164 JOURNAL OF POST KEYNESIAN ECONOMICS

Table 3

Leakages and injections

(percent of net national product)

year NFS + NPS =FGD + SS + SLD + NPI- SD

1987 4.0 4.6 4.7 -0.7 -1.3 5.8 -0.2

1986 3.8 6.0 6.0 -0.6 -1.6 5.5 -0.4
1985 3.2 6.4 5.9 -0.4 -1.8 5.8 -0.1
1984 2.7 7.7 5.3 -0.2 -1.9 7.4 -0.2
1983 1.1 6.5 6.0 -0.2 -1.6 3.5 -0.2
1982 0.0 6.2 5.1 0.1 -1.3 2.3 0.0
1981 -0.4 7.5 2.3 0.1 -1.3 6.2 0.2
1980 -0.5 7.2 2.5 0.0 -1.1 5.5 0.2
1979 -0.1 8.1 0.7 0.0 -1.2 8.4 0.0
1978 0.5 8.9 1.4 0.1 -1.4 9.3 -0.1
1977 0.5 8.6 2.4 0.2 -1.5 8.0 0.0
1976 -0.5 8.9 3.1 0.2 -0.9 6.1 0.2
1975 -1.5 9.9 5.1 -0.3 -0.3 4.0 0.2

Notes: Sources and symbols the same as those in Table 2. Other symbols:
NFS = netforeign saving (-NFl); NPS = PS + NBS; FGD = federal govern-
ment deficit less Social Security and Medicare surplus; SS = Social Security
and Medicare deficit; SLD = state and local government deficit (-SLS). The
sum of columns 1-2 may not equal the sum of columns 3-7 due to rounding
error.

private investment plus the government deficit at all levels of govem-

ment. Thus, government deficit spending plus investment provide the
income that can be saved or transferred to foreigners. Examining leak-
ages of income to foreigners, one finds that, until 1982, this was
generally a negative number (that is, it represented an injection rather
than a leakage), but turned positive and rose rapidly to 4 percent of NNP
by 1987.9 Thus, given a constant level of injections, we have experi-
enced a significant shift in the form that leakages take: more U.S. income
leaks into the hands of foreigners. On the injection side, net private
domestic investment has fallen from 7.7 percent of NNP during the

9 Unless otlerwise noted, all data were calculated from the Economic Report of the
President, January 1989.

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 THE SOCIAL SECURI7Y TRUST FUND AND SAVINGS 16S

decades of the 1950s and 1960s, to 7.5 percent during the 1970
only 5.8 percent by 1987 (Aaron et al., 1989, p. 6). However, net
government injections have increased from only 0.3 percent of NNP
during the 1960s, to 1 percent during the 1970s, and to 2.6 percent by
1987. The Social Security program and state and local government
spending are potentially injections, but because they currently run
surpluses, they reduce total injections provided by the government,
which would have reached 4.7 percent of NNP in the absence of these
surpluses. Social Security leakages will increasingly reduce the effec-
tiveness of private investment and govenunent deficits in stimulating
the economy, and it will take ever-increasingly large injections of
investment and government spending to provide the income that can be
taxed and funneled into the trust fund.
There is a good theoretical justification for preferring the exposition
presented in Table 3 over that of Table 2. The investment and the
government sectors are the primary sectors where discretionary deficit
spending occurs. While the household sector could run deficits and
thereby be a source of injections, such behavior is unlikely in the
aggregate. Deficit spending by private agents should be based on the
belief that it will raise future income, out of which debt commitments
can be met. As deficit spending by an individual household is unlikely
to raise its future income, deficit spending will primarily represent an
attemptto rectify amismatch of income and desired consumption across
time. Net foreign investment can be affected by discretionary policy,
but it is also subject to policies undertaken by foreigners and to other
factors over which we may have little control.
On the other hand, government deficit spending and private invest-
ment are largely discretionary variables. Net private investment is
undertaken with the expectation that it will raise future income. An
increase of net investment must be financed through deficit spending,
and will enable aggregate income to increase (Terzi, 1986/87). How-
ever, whether any particular investment will capture this rising income
in the form of profit flows cannot be guaranteed. The state of future
effective demand will be one of the important factors that detennine
whether any given investment project proves profitable. Government
deficit spending also enables income to grow, which will raise govern-
ment revenues as the tax base increases (Wray, 1989). While there is no
guarantee that government deficits will raise revenues sufficiently to
finance them, the government does not face the profitability constraints

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166 JOURNAL OF POST KEYNESIAN ECONOMICS

faced by firns. Therefore, govenmment deficit spending need not

based on expectations in the same way that investment decisions m
be constrained by expected profitability.
The U.S. economy chronically functions below ful capacity. Even
during the "longestpeacetime expansion" era of the 1980s, the capacity
utilization rate averaged only 80 percent.10 The inducement to invest
was hindered by such low rates of capacity utilization: real private net
fixed nonresidential investment was lower in the 1980s than in the
sluggish 1970s.11 Since we can only provide for rising numbers of
retirees at an adequate standard of living by increasing productive
capacity, we must increase current levels of effective demand in order
to encourage more investment. This can be done by reducing payroll
taxes sufficiently to reduce the surplus in the Social Security program.
As the baby boom retires next century, we can then ensure a decent
standard of living for all by generating a level of effective demand
sufficient to operate the economy at full capacity. This can be done then,
just as it can be done now, through deficit spending.

m. Interest payments on bonds held by foreigners

If the government were to cut payroll taxes and return Social Security
to a pay-as-you-go system, then fewer new bonds would be sold to the
Social Security trust fund and more would be sold to the public. To the
extent that some of the additional public placements are purchased by
foreigners (in excess of the amount they are currently buying), the
govenment will be committed to making greater interest payments to
foreigners (rather than to the Social Security trust fund). When these
interest payments are made, the foreigners will have additional claims
on U.S. goods, services and assets.12 This might be used as an argument

10 This is the average capacity utilization rate for industry for the period 1983 to No-
vember 1988. Source: Economic Report of the President, 1989, p. 365.
11 In 1987, real private net fixed nonresidential investment was still only 63 percent
of the 1979 level. Between 1980 and 1987, real private net fixed nonresidential in-
vestment averaged only 95 percent of the average attained during the 1970s. Source:
Economic Report of the President, 1989, p. 327. Frumldn (1988, Figure 19, p. 123)
shows that high capacity utilization rates are closely related to investnent in manu-
facturing.

12 Of course, additional sales of corporate debt to foreigners (such as that arising

from leveraged buyouts) also generates similar future interest payments that are

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 THE SOCIAL SECURI7Y TRUST FUND AND SAVINGS 167

against returning the Social Security program to a pay-as-you-go sys

as long as the rest of the government budget is in deficit.
However, even if the foreigners were to exercise these additional
claims at the future dates of interest payments, this would not necessarily
reduce the real benefits that would be available to future Social Security
pensioners, as long as the United States had unemployed resources
available at that future time. Only if the United States were to maintain
a continuous state of full employment could one unequivocally state that
foreigners who used these additional future interest receipts to purchase
American goods would reduce the quantity of consumergoods available
to pensioners vis-a-vis what these retirees could have received from a
fully employed economy.
As discussed above, the U. S. economy has not operated at full capacity
in the past few decades, nor is it likely to do so in the presence of a Social
Security surplus. By reducing payroll taxes, aggregate demand can
increase and allow the economy to operate closer to full capacity. If the
United States were to maintain full employment overthe next forty years
(by providing sufficient govenment deficit spending each year), then
productivity and productive capacity would grow at a faster rate and the
rate of growth of the GNP would be higher. While it is true that interest
payments to foreigners might be higher under this full employment
scenario, and that they could exercise larger claims to a share of the
American pie, that pie would be much larger than the pie that will result
from decades of slow growth occasioned by attempts to accumulate a
Social Security trust fund. Consequently, there is no reason to fear that
the real standard of living of Social Security recipients will decline in
the far distant future, merely because we reduce the payroll tax today.

IV. Conclusion

Payroll taxes used to accumulate a Social Security trust fund unnec

sarily burden the current generation by reducing effective deman
This also burdens future generations to the extent that insufficient
aggregate demand constrains investment. The only way to reduce bur-
dens on future generations is to provide them with productive capacity

possible claims on U.S. production. The author would like to thank Paul Davidson
for providing most of the analysis presented in this section.
13 The Social Security surplus represented a drain of more than $67 billion in 1989,
and is projected to reduce effective demand by $115 billion in 1993. See Table 1.

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168 JOURNAL OF POST KEYNESIAN ECONOMICS

and with adequate effective demand. The best way to encourage inv
ment in plant and equipment is to raise the current level of aggregate
effective demand. Rather than trying to provide further incentives for
consumer saving, we need to increase disposable income so that con-
sumers can increase spending and encourage investment.14 Further-
more, rather than trying to decide what to do with the trust fund, it would
be far better to abolish it.
Will we be able to provide for the retiring baby boom? This will
depend on the average productivity of the labor force and on the
proportion of the working population to the dependent population. In
1965, the ratio of the portion of the population over the age of 64 to the
portion between the ages of 20 and 64 was 0.182.15 By 1985, this ratio
had risen to 0.200, and it is projected to nearly double to 0.378 by the
year 2030. However, if the portion of the population over 64 is added
to the portion of the population under 20 to give a ratio of the dependent
population (the young and the aged) to the population of working age,
this ratio peaked in 1965 at 0.946, fell to 0.704 in 1985, and will rise
only slightly to 0.801 by the year 2030. In other words, the working
population in 1965 supported a relatively larger dependent population
than it is likely to ever support again. If the labor force participation rates
of women continue to rise, each household will support increasingly
fewer dependents per working member compared to 1965. Admittedly,
there are some countervailing tendencies: the population is retiring at
an earlier age, and dependent aged may require more resources than do
dependent young. However, projected demographic changes do not
appear to foretell disaster.
Growth of productivity, of course, will lower the burden of providing
for the small projected relative increase in the dependent population. In
1947, it took about seven farmers and twelve industrial workers to
provide the goods purchased by one hundred consumers. Forty years
later, one farmer and ten industrial workers provided all the goods
bought by one hundred consumers, while another thirty-two workers

14 Consumers can't affect the level of savings by trying to save, anyway, as is dem-
onstrated in every principles course. Consumers possess a "widow's cruse" with re-
gard to savings: no matter how hard they try to decrease savings, they cannot directly
reduce it. Indeed, attempts to lower savings are much more likely to increase savings,
as firms experience rising sales and respond by increasing capacity through invest-
ment.
15 Data on demographic projections are from Aaron et al. (1989, p. 3).

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 THE SOCIAL SECURrIY TRUST FUJND AND SAVINGS 169

provided the necessary services purchased by the same number of

consumers. During this forty-yearperiod, labor productivity doubled to
quadrupled, depending on the sector of the economy, so that the basket
of goods consumed by those one hundred consumers had grown con-
siderably.16 Is it reasonable to assume that productivity will continue to
increase over the next forty years? If productivity does not grow at all,
but the dependent population grows relatively by approximately 14
percent (as is projected), then living standards will fall as the baby boom
retires. However, if productivity doubles, then living standards will be
substantially higher in the year 2030 than they are today, even with the
baby boom retirees.
The primary detenninants of the rate of growth of productivity will be
investment and the level of effective demand. Investment spending has
two effects: the aggregate demand effect and the capacity effect. As
Walker and Vatter (1989) argue, capital-ouput ratios have been falling
due to capital-saving technology. This means that the capacity effect of
investment has been rising, so that, in tum, the potential aggregate
demand effect of investment has been falling. That is, investment
increases capacity so much that it cannot be relied upon as a steady
source of effective demand. Govemment deficit spending has therefore
become increasingly important as a source of effective demand, which
is required so that capital can be operated close to capacity. In the
absence of such deficits, excess capacity hinders investnent and pro-
ductivity growth. As Walker and Vatter argue, during the expansionary
decade of the 1960s, government spending, investment, and productiv-
ity increased together: "Government spending and investnent were
complements, not substitutes" (Walker and Vatter, 1989, p. 333).
Indeed, the retiring baby boom should be seen as a great opportunity
for stimulating growth, rather than as a justification for austerity pro-
grams. When Social Security revenues fall below expenditures, these
deficits will add to other govenment deficits to generate income growth,
which will help to stimulate further investnent in productive capacity.
In the meantime, payroll taxes should be immediately reduced to elim-
inate surpluses, so that the economy can operate closer to capacity today
in order to encourage productivity growth before the baby boom retires.

16 Data on productivity are calculated from Economic Report ofthe President, 1989,
Tables B-32, B-48, B-49, B-50, and B-51.

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170 JOURNAL OF POST KEYNESIAN ECONOMICS

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