Thursday, December 06, 2012

The other deficit problem

In "Our Demographic Decline", Megan McArdle discusses how future fiscal promises are dependent on a growing population and how America isn't keeping up.
Those promises can be abrogated, of course. By law, Social Security will stop paying benefits in excess of its intake as soon as the "trust fund" is exhausted. And even in the absence of such provisions, governments can default, companies can declare bankruptcy. Or debts can be inflated away. But then what happens to the folks who planned futures around those promises? 
This is an important question for everyone, not just the unlucky retirees or welfare state beneficiaries who find themselves on the wrong side of fiscal history. This kind of mass default is going to undermine social cohesion and create a great deal of economic chaos. It's also going to radically alter the incentives to save and invest. Any form of saving beyond simply stockpiling food and ammunition is a sort of trade deal with the future: you create capital stock now, on the assumption that workers of the future will let you share in the extra productivity your savings helped create. If the future reneges, people may decide that they might as well be a grasshopper, since the ant gets just as screwed.  
The fiscal and demographic problems of entitlements are inextricably linked and virtually unsolvable, given the political backlash if baby boomers don't get what's theirs.  Time to go full Grasshopper.

1 comment:

The Sanity Inspector said...

Glad I'm diversified, hope at least something will not get washed away like beach sand when Hurricane Debt Reckoning comes ashore.