(btw, I didn't mean to imply that the funding of social security would be the only solution to the looming crisis--I don't think you took it that way, but just saying to clarify.)

There is, however, no reason for it to "fund" future entitlements in financial terms, because the constraint on whether it can meet future entitlements is not a financial constraint. If there is adequate productive capacity to provide the goods and services, at terms of transfer that the working generations of that day can live with in return for the promise that they will be taken care of when they retire in turn, there is no problem.

 But isn't that highlighted point exactly the problem.  The incredible size of the baby boomer generation has caused enormous problems (starting with class sizes exploding and school facilities not ready for the bulge 50 years ago) as it has gone through the demographic cycle.  I'm under the impression that the combined impact of SS and Medicare, coupled with longer life spans and wonderful, but costly, new medicines and medical procedures, will not allow the generations following to pay for the boomers.

The argument against simply using the government's money issuing power to fund social insurance is that if the economy is in an inflationary environment, this injection of liquidity destabilizes the economy. So in line with the payments being made, which creates purchasing power, an equivalent amount of purchasing power should be destroyed via taxation.

This policy would use monetary policy to further aggravate and stimulate an inflation (the opposite of what central banks have learned to do to control inflation), and add to that a negative fiscal stimulus that would slow the economy and raise unemployment.  I think you've shot both Friedman and Keynes with this policy--got 'em with one bullet.

Buying private sector securities is simply a means of inflating the value of those securities and provide additional commission income to those in the financial sector. That funding can never actually be allowed to be drawn down, because then that would depress the value of private securities.

There is an investment policy that would work here.

1.  Some of the funding of social security could be done as it is today--a certain %.
   
2.  An appropriately conservative portfolio approach would be used considering the needs of the retiring.  This would certainly mean using more financial vehicles than US Equities.  Liquid international markets with transparency should certainly be included.  And the portfolio should have private bonds as well.
   
3.  And I would think there would be a transition into this approach.  you wouldn't take 50% of the "social security trust", such as it is, and put it into the markets tomorrow.  And the great thing about demographics is that you can see what is coming--so you won't need panic withdrawals, as an individual might need.

But the approach would certainly relieve the stress on these pay as you go systems,,particularly with population bulges like the boomers.