Saving for the baby boomers
I have seen quite a few discussions about the national debt recently, and one of the arguments that always crops up, and is especially silly, is that the Government needs to save money to pay for the future costs of the baby boom generation retiring.
Now, I understand why this argument is so popular, at first glance it makes sense. If I want to be comfortable when I retire, then I need to start saving now. Shouldn’t the same principle apply to the Government?
Simply put, no.
When the government saves (takes in more money than it puts out) the savings take the form of U.S. Government Bonds. Think about that for a moment, and then follow through on the scenario.
I am the U.S. government and this year I am going to have to pay out $200 dollars to baby boomers. Unfortunately, I only am able to tax $100 dollars of that. Big problem right? Luckily though, I own $100 dollars worth of U.S. Government Bonds, the safest investment on the planet, so with my $100 in cash and my $100 in bonds I should be ok right? So I go to cash out my bonds, and I give those bonds back to myself fulfilling their term (making them now worthless) and I pay myself $100, the value of the bonds. And I have $100 dollars and no bonds. Still $100 dollars short. So I will have to issue new bonds and sell them to the private sector for $100 to pay, ending up with a $100 dollar worth of deficit.
Now imagine if I had done the horrible thing of not saving for the baby boomers. I only have $100 but will have to pay out $200, so I issue new bonds…hey its exactly the same.
Now, obviously it doesn’t work like that for a private citizen. If I have $100 cash and $100 in bonds, then I have $200 dollars worth of assets, not just $100.
So it is valid to question where that asset that the government seemed to have went.
The answer is pretty simple. It disappeared into thin air. Which really isn’t so bad as that is where it came from in the first place.
(Note that this would be different if the government were investing in private enterprise instead of public debt, but that has its own problems)
