Social Security: A Creative Solution

2010 Social Security beneficiaries will not receive a cost of living increase.

Before all you grannies forcibly dependent on government retirement get your panties in a bunch, please realize that this non-action represents a gain for retirees. You see, over the past year we bore witness to a period of negative inflation. Thus, constant payment rates result in a net gain in terms of purchasing power.

I heard this story on the radio this morning while commuting to work. The otherwise rainy day became instantly brighter. I nearly had to pull over to fully enjoy the hardy laugh this story deserved. We've experienced a negative inflation rate?

During the 20th century, the economical sciences experienced a change in nomenclature. Inflation used to refer to an increase in the money supply. This is often derogatorily referred to as the "traditionalist" definition. The term was replaced by a pair of terms: monetary inflation and price inflation. Monetary inflation took on the meaning of the "traditionalist" definition while price inflation referred to an increase in the overall price level.

As one of their many astute observations, the Austrians recognized the superfluous nature of the price inflation definition. Price inflation follows inevitably from monetary inflation. Calling the cause and the effect by two separate names only obscures the link between them. Any attempt to combat the former while ignoring the latter will be doomed to failure.

Under the Austrian/Traditionalist definition, one can not think of a more eggregiouis lie than to claim a negative inflation rate from 2009 to 2010. Although official M3 data has not been released for political reasons, currency numbers, M1, M2, and the Rothbardian TMS have all exploded in the last year. We already have inflation. Prices may be momentarily held down, but the inflation is here.

Unsurprisingly, government tends to manipulate price inflation numbers in their favor. As powerful as semantic manipulation may be, nothing confuses a government educated populace like cold hard numbers. So enters the CPI as a measure of price inflation. Besides the futility of examining price inflation rather than monetary inflation, CPI provides easiest means for the state to change data in the shadows. To quote the Bureau of Labor Statistics: "The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services." Without going into messy details, the problem with this as a scientific definition comes when we try to define a "market basket". The elusiveness of this term allows governments to easily mask inflationary expenses. If agricultural prices are experiencing positive velocity, simply remove agriculture from your measured basket and replace it with another commodity. Measurable inflation? No problem, just change your basket goods. The ball is in the government's court. They know what to do with it.

So here we have government's solution to Social Security. The system is bankrupt. Everyone knows this. How do we reduce the costs? We simply redefine inflation. We change our CPI basket. To hell with reality, reality can't compete with the handy, easily referenced numbers provided by the CPI. It's quite easy to erase growing costs when you can keep them from growing while convincing the public they're not losing anything.

The real secret about social security isn't that the system is going to fail. It is that the system has already failed. It's insolvent. It's time to move past unsustainable government promises, and back to reality and personal responsibility.