Shortly after the November election, recommendations will be presented by the National Commission on Social Security Reform. It should heed the lesson of the Static Islanders.
You remember the group: 100 shipwreck survivors whose progeny for centuries have occupied Static Island.
What has fascinated economists in their studies of the island are its three peculiar characteristics. First, population remains forever constant at 100. Second, only food must be produced; nature provides all other necessities. Third, the islanders never save; without saving and investment, worker productivity never improves.
From the beginning, these conditions produced a simple economic system. Each of the 100 inhabitants needed 18 ounces of rice per day for survival, and each worker could produce exactly two ounces of rice per hour. Therefore, nine hours of work per day by all inhabitants would have supplied all food required.
But this was an island with a heart. Although most oldsters perished in the sea, among those who made shore were 10 who were over 65 years of age. Without hesitation, the 90 survivors under 65 volunteered to do all the work. Ten hours daily of rice growing by each of the 90 would supply the island's total requirement of 1,800 ounces. Ninety would produce, 100 would consume, and all would feel secure about eating throughout their lifetimes.
This monastic rice-only regime prevailed until it was discovered that a nonnutritional but splendidly intoxicating wine could be produced from an abundant, indigenous berry. The good life was quickly redefined. Nine ounces of wine daily per person seemed fitting, and the islanders committed themselves to the extra work required to ferment this quantity of wine.
One evening, after a particularly intensive wine- imbibing session, the planners--better politicians than demographers--voted that all inhabitants reaching 65 be forever guaranteed their daily 18 ounces of rice and nine ounces of wine.
Such a statutory affirmation of present behavior seemed harmless. And there was a psychic dividend: those currently producing could now feel certain that the benefits for them in retirement years would equal the benefits they had provided for current retirees. In effect, this statute provided with precision what cost-of-living adjustments attempt to provide in rough measure in more complex economic systems--a constant standard of living for retirees.
Many generations pass. Improved longevity plus a low birth rate have today created an island with 70 producers and 30 retirees. The island still needs 1,800 ounces of rice daily for survival of its 100 inhabitants, and that need alone would require all 70 workers to toil almost 13 hours per day.
But, if all 70 raised rice, the retirees' standard of living would be illegally reduced. The statutory obligation to retirees mandates 270 ounces of wine daily (30 retirees x 9 ounces); four workers therefore must be assigned to this activity. Working 131/2 hours a day, these workers can fulfill promises to the retirees. Meanwhile, the remaining 66 workers can raise the rice required for both workers and retirees in slightly over 131/2 hours of daily work.
This schedule will leave the working force subsisting on rice alone, foregoing their former ration of wine. Even so, those 70 workers will have to work 13 percent longer than in the "90/10" era in order to redeem their pledges to the retirees. Retirees will not be better off than formerly, but workers will be working more and consuming less.
If the producers wish to maintain their own standard of living of rice plus wine, they must work no less than 15 hours and 26 minutes daily (90 producers x 12 hours e 70 producers x 15 hours and 26 minutes).
The Static Islanders now have learned that promises regarding future consumption must be constrained by a knowledge of demographics and realistic estimates of future production.
The only escape from the demographic trap is to increase productivity. However, that would require savings--a concept foreign to our islanders. How much better it would have been if 85 of the original 90 rice growers had worked slightly longer each day, thereby "saving" the labor of five of the more inventive workers who could have devoted that "invested" labor to the fashioning of farm tools.
That action by the islanders would have been equivalent to the adoption of a private pension plan. If such a plan, with its compulsory heavy savings component, had been utilized instead of the no-savings governmental transfer plan, gain would have fed upon gain.
The regular commitment of "investment" labor would have generated progressively better rice- producing and wine-fermenting equipment, allowing greater output per hour. Labor thereby released from farming would soon have been producing goods previously unthought of. This increase in productivity would have more than offset the drag of adverse demographics. All the islanders, including retirees, would have had far more product to consume, and producers would have been working shorter, rather than longer, hours.
But if that is the way the residents had operated, of course, they wouldn't be known as the Static Islanders.
Let's bid adieu to these economically illiterate islanders and look at a really advanced civilization -- our own.
Our U.S. ratio of Social Security transferees to producing Social Security transfers is about 25/75, up from 10/90 in the mid-1950s. You can take your pick from projections, but the probabilities are high that the Static Islanders' 30/70 ratio will be far exceeded on our own much larger island in the next half century. With demographics working against us, our hope must lie in productivity gains.
There's trouble on this front also. Inflation has made much saving appear foolish in retrospect. Furthermore, most of our citizens understandably now regard savings as less necessary than in the past. Absent a governmental transfer plan, these citizens would provide for retirement by personal (IRAs, life insurance) or group (corporate) pension programs that inevitably embody massive savings and investment. Instead, they rely on Social Security transfer payments, involving no savings component, for much of their retirement income. Thus, our national savings rate is low, and productivity gains recently have been negligible.
Originally, all was peaches and cream. When, through Social Security statutes, politicians initially promise Paul a bright economic lifetime from the future production of Peter, Paul feels richer while Peter feels nothing (he may not even be born). The PNP (Psychic National Product) increases while the RNP (Real National Product) is unchanged. Temporary illusions regarding aggregate wealth understandably produce euphoria. Euphoria, in turn, produces votes. But neither an illusion nor euphoria can produce rice.
As demographic trends grind away, either (1) productivity must rise significantly, (2) producers must lose economic ground, or (3) retiree promises must be modified. Congress must soon face its ultimate nightmare: talking to Peter and Paul simultaneously.