Will Default or Inflation fix Social Seccurity woes?

“Social security is an obligation the government has to it’s people.” I agree, but the Government isn’t above the law of finance. If they can’t pay for it, then they will default; either through outright default ( say “tough shit and deal”) or through inflation.

The “tough shit” approach will hurt seniors but that’s it, anyone not getting SS benefits will just have to start saving themselves, which will lead to economic growth, under a simple Solow model. But, it’s politically unfeasible. Seniors are a dedicated voting block and have their own self-interest first and foremost.

I don’t blame them either. They paid in, with the promise of a return by the Fed Government. In theory, that promise should have been good. In practice, that promise was meaningless as soon as the Government started paying other people off with SS money.

Inflation will hurt everyone and in the long run is more harmful than anything else. Unfortunately, it’s the most politically appealing path. Inflation is a creeping tax. Government use it because it decreases the purchasing power of the currency, so a Government pays off it’s debts with worthless paper.

Charles Rowley, economist at GMU , explains it well.

There are only three ways for a government to cover the cost of its spending: debt, regular taxes, and inflation.  Because regular tax increases cannot be hidden, at least easily, they tend to be vote losers, to be resorted to only as a last resort, and even then, only in a discriminatory manner designed to impact adversely on a small minority of voters. Because increased debt is less transparent to the voters, and therefore, politically feasible, deficit-financing tends to be the preferred instrument, up to the point where  its burden becomes apparent to the international community. At that point, inflation tends to comes into play, as governments scramble to reduce the real burden of the debt by debauching its currency.

When the currency is worth less and less, those on fixed incomes are hurt more and more. Prices go up in times of inflation, ask anyone around during the Carter years. Fixed incomes do not. The Government does not index SS benefits with inflation, they merely vote in a cost of living increase.

Here is some news for you, that COL increase is worthless. It’s measured using a flawed CPI number. I say flawed because it excludes such trivial things as energy and food. We all know how meaningless those things are right?Also, the weighting of the basket of goods is all off. It give a higher weight to goods that are falling in price rather than those rising in price. It’s akin to having 100 people; 90 Democrats, 4 Greens and 6 Republicans and finding the average approval for Bush. It’s not going to be an accurate representation.

From ShadowStats:

The Boskin/Greenspan argument was that when steak got too expensive, the consumer would substitute hamburger for the steak, and that the inflation measure should reflect the costs tied to buying hamburger versus steak, instead of steak versus steak. Of course, replacing hamburger for steak in the calculations would reduce the inflation rate, but it represented the rate of inflation in terms of maintaining a declining standard of living. Cost of living was being replaced by the cost of survival. The old system told you how much you had to increase your income in order to keep buying steak. The new system promised you hamburger, and then dog food, perhaps, after that….

The BLS initially did not institute a new CPI measurement using a variable-basket of goods that allowed substitution of hamburger for steak, but rather tried to approximate the effect by changing the weighting of goods in the CPI fixed basket. Over a period of several years, straight arithmetic weighting of the CPI components was shifted to a geometric weighting. The Boskin/Greenspan benefit of a geometric weighting was that it automatically gave a lower weighting to CPI components that were rising in price, and a higher weighting to those items dropping in price.

Once the system had been shifted fully to geometric weighting, the net effect was to reduce reported CPI on an annual, or year-over-year basis, by 2.7% from what it would have been based on the traditional weighting methodology. The results have been dramatic. The compounding effect since the early-1990s has reduced annual cost of living adjustments in social security by more than a third.

People on fixed incomes or low incomes spend the majority of their money on food and energy. So an increase in those two things, which aren’t part of CPI or COL, will negatively impact the standard of living of those people. Are seniors better off with that?

It’s a difficult question to face; default or inflation. I’m more inclined to argue for default. Sovereign default means that the people in charge and the people the caused the mess will be held accountable, to a certain extent. Inflation just mean pawning it off on the next guy.