From an accounting standpoint, future retirement is considered as properly prefunded if either the government sets aside tax money to make future payments or if an individual himself saves his own money for the same purpose.
In the following example, I try to suggest that even if this accounting requirement is satisfied, and even if the government otherwise follows a sound, non-inflationary monetary policy, the retirement funds themselves may well produce just as much price inflation as if the government had simply inflated the money supply to create the retirement funds.
To the extent that the retirement funding merely replaces pre-retirement income, the price inflation will only be the result of a reduction in the supply of labor, and the resulting shortage of goods and services, if not replaced by increased productivity. Seen in this light, the future deficits in social security shouldn’t be seen as a completely monetary and tax shortfall phenomenon, but as in part a supply of goods and services issue. This means that although overseas workers cannot be made subject to payroll taxes, they may still be part of the solution in the form of the goods that they supply.
Assume that I have been retired for 5 years when I unexpectedly start getting a monthly check for $1000. This results in a change in my purchasing choices and will produce an incremental inflationary pressure on the prices of the goods and services that I now buy, whether the goods and services are different or whether I simply am willing to pay higher prices for the same goods and services.
If the $1000 check comes from the government and is the result of it simply creating new money out of thin air, there is no mystery to be explained as I am simply part of the mechanism by which monetary supply inflation is transformed into price inflation.
However, if the money instead comes from a long forgotten government vault last opened 50 years ago, even if I were aware of this fact, it is likely that my purchasing decisions would be the same and the resulting inflationary pressure on prices would be the same.
Similarly, if the source of the money were a long forgotten bank safety deposit box, jointly filled by my brother and myself 50 years ago, the result would still be the same.
In summary, price inflation is the result of an increase in the purchasing power of individuals which they choose to employ to achieve subjective goals. The source of this purchasing power increase may or may not be monetary supply inflation, in either the present or in the past. It may equally well be some form of effective monetary supply deflation in the past.
Since Austrian theory does not allow monetary supply deflation to be considered a remedy for a previous monetary supply inflation, or the reverse, a given increase in purchasing power must be considered just as much of a factor of increase in price inflation, independent of whether the source of the purchasing power is a monetary supply inflation or not.