Money is a vague IOU from government to the holder.
When Social Security proceeds are invested in treasury notes, the notes have to be repaid by future generations.
The only way that Social Security proceeds could be truly invested now for the use of future generations would be through the government purchasing stocks, bonds or real estate, thus taking ownership to property, directly or indirectly. It could then sell the property at a future date in order to fund Social Security payments.
If the government purchased stocks, bonds and real estate, it would become a major investor in the economy and be involved in the free enterprise system. This might or might not be a good thing.
However, there was much concern expressed when the federal government had to acquire much of Fannie Mae, Freddie Mae, AIG, General Motors and Citibank in order to assist them and, in some cases, to enable them to survive. The government is liquidating these investments as opportunity permits, and it appears that much if not all of the investments will be recouped, albeit not without other costs to the taxpayers such as loans at low interests to the banks which have enabled them to become very profitable.
What payments into FICA actually achieve is to reduce consumer buying power at the time taxes are paid. This either makes room for investments by others, government programs or either less need for the federal government to borrow (which is to reduce consumption and investment) or possibly to pay down its borrowings (which is to enable more consumption and investment.) In times of high unemployment, paying increased FICA taxes can make things worse.
M0reover, when the government sells treasury notes to people in the country, it amounts to borrowing goods and services from some to be repaid in goods and services later. When it sells treasury notes to the Chinese, it is to borrow Chinese goods and services now that must be repaid with goods and services to the Chinese at a later date. The need to borrow heavily from abroad results from budgetary deficits.
If the money borrowed from abroad is invested wisely in domestic education, infrastructure and capital goods, increased earnings may ease the ability for future generations to repay the foreign debt.
Few people understand the nature of money. It isn’t worth the paper it is printed on except, by consensus, we agree to exchange it for goods and services. That’s a good thing, although some would prefer that each dollar be backed up with gold in For Knox. (Due to its scant utility, the value of gold is also a matter of consensus.) Backing currency with gold is not a good thing, and perhaps subject for a future article.
When the Fed creates money, a credit on its books, it also creates loans to banks, a debit on its books. So money is not a floating IOU. It is matched by assets.
Social Security proceeds are being used to offset lower income taxes–that was part of the 1986 tax “reform” designed by Alan Greenspan. It made the whole system more regressive.
There’s real investment and there’s paper investment. One hopes that proceeds of paper investments–stocks, bonds, savings deposits–get translated into real productive investment, especially investment in “human capital”. The fundamental issue is the quality of the investments. (My grandmother kept racehorses, nominally a real investment, but actually pure consumption.)
Some government investment is highly productive: urban infrastructure (not bridges to nowhere), public education, public health, police and courts–the services normally provided by state and local governments. At the federal level, social safety nets starting with Social Security. Supposedly national defense, but as an investment, that’s a big loser these days–except for Haliburton and Bechtel.
I don’t think government wants to be running banks or insurance companies, but it should regulate them because the opportunities for fraud are huge and the consequences potentially or actually disastrous. In the 2008 crisis, I think the government should have taken over the big banks, forced a haircut on the bondholders, and sold off viable pieces as quickly as possible.
At present, the Fed holds a huge inventory of toxic waste, which it is keeping off the markets to avoid further depressing real estate prices. That’s not productive investment! In fact it heads us towards Japan-style stagnation by keeping the zombies alive.
Enough!