Psychology defines magical thinking as continued belief with no rational theory or contrary to evidences. I have always loved the accompanying cartoon by Sidney Harris:

Yes, this scientist needs some more work on his models. This form of unrealistic proof is on display in a recent study from AARP, the old American Association of Retirement Persons.

AARP’s premise:  “Social Security Generates $1.4 Trillion in Economic Activity and Supports More Than 9 Million Jobs.”  [AARP Press Center, October 1, 2013](1) Fact:  Social Security paid out $775 billion in retirement, survivor, and disability payments in 2012. AARP asserts the well-known “Multiplier Effect,” that is, a dollar spent by someone on a product or service is re-spent by the merchant to make his product or service, generates income for she and her employees which is re-spent and so on. Someone’s expenditure is somebody else’s income, starting an endless cycle. Supposedly, Social Security payments create economic benefits worth nearly double what is given to recipients.

Wow! This is amazing. Why have we not heard this before? It sounds like we need more government programs like this, not less as some politicians, parties and advocacy groups recommend. I have a few questions about spectacular assertions like this, especially when they are clearly designed to advocate for either more taxes or more benefits. I hope they seem as common sense to you as they do to me.

Taking assertions to logical extremes often reveals their fatuity. Suppose we were to empower our federal government, via a “Life Security” program, to take all U.S. personal income (today about $14 trillion) from our citizens and then redistribute to us according to a set of regulations. Silly, of course, but what would result? Would AARP conclude that “Life Security Generates  $28 Trillion in Economic Activity and Supports the Majority of U.S. Jobs?” Where did the extra $14 trillion in activity come from as a result of “Life Security?” Did it appear from nowhere, or was it already there?  Here is what is unseen, according to Frédéric Bastiat’s insightful treatise, “What is Seen and What is Not Seen.” (2):  Every monetary activity or exchange generates a cascading effect, but if that exchange doesn’t happen the money will generally be spent on some other cascading activity. When viewed over a period of time, all private and public economic activity creates these effects when money is spent.

Social Security taxes today’s workers to pay all of today’s retirees. Money is not held or invested by the government like they are by an insurance company. There is no real Trust Fund for the taxes you paid 10, 20, 30 years ago, not to mention interest thereon. There is no Lock Box, nor can there be without government becoming the single largest investor with dangerous control of U.S. industry. The trust fund is “invested” in government bonds, but this means nothing more than future taxes. Anybody who tells you different is engaging in misdirection and magical thinking. In 2012, the payroll taxes extracted to pay for benefits were $616 billion and the remainder “borrowed” [the 2013 Annual Report of the Board of Trustees of The Federal Old-Age and Survivors Insurance and Federal Disability Insurance]. What happens to the economic activity of the workers from whom the taxes are extracted? They can’t spend it.  It never happens.  Is there a negative multiplier effect? Of course. The worker can’t buy services and products to that extent (or can’t save as much). Then those merchants can’t buy as much, and so on.

In the AARP-touted analysis, this component of taxation and redistribution is ignored, and that caveat buried deep into the document: “…this analysis takes the payroll taxes, which are the primary funding source for Social Security benefits, as given, and therefore does not consider them or their effects. A net analysis would likely show some or even most of the positive effects of Social Security benefits described in this paper as being offset by the program’s payroll taxes.” Realizing that omission, what is the economic value of government redistributing income? ZERO. Any economist, politician, or advocacy business for those 50+, who asserts otherwise to justify their theories, vote acquisition, or profits, is indulging in magical thinking. Redistributing income may serve some other societal function, but it doesn’t magically create societal wealth. REAL multiplier wealth is created in the private sector by voluntary purchases of voluntarily produced products.

Insurance companies are a foundation of conservative financial investment in the United States, financing growth, expansion and innovation for business in most industries. The benefits of saving and then spending are the real long-term multiplier through capital investment, productivity increase, benefiting an entire society. Our insurance industry is instrumental in helping America plan, save and then guarantees them and their heirs income to spend, thanks to their thoughtful preparation for the future. Magical thinking is not nearly so helpful. More on that in Part 2 of this article. The safe accumulation and income guarantees you sell as an insurance agent cannot be overemphasized. They are more valuable today than ever.