Friday, March 06, 2009

Milton Friedman on Social Security

by Bruce Webb
(this post was originally intended for publication at Angry Bear, but I am not totally satisfied with it so will just leave it here)

Opposition to Social Security is most often expressed in terms of efficiency with assertions that ultimately it will not work at all ('bankrupt', 'dead broke') or that it will require unacceptable tradeoffs ('tax increases', 'program cuts') or that it is simply unfair burden shifting ('intergenerational inequity'). These arguments generally reduce to 'Private (or Personal) Retirement Accounts would work better'. But on examination the proposals to transition to PRAs don't actually seem to work better, not from the standpoint of individual workers. Which has led supporters of traditional Social Security to accuse opponents of being thieves dying to get ahold of the future revenue stream and/or not wanting to pay back past borrowings.

There is some justice to this charge, an appeal to the banks, insurance companies and others that would benefit from private accounts is explicitly laid out in the 1983 battle plan presented by Butler and Germanis Achieving Social Security Reform: a 'Leninist' Strategy. And a fair reading of the Liebman-MacGuineas-Samwick Non-Partisan Social Security Reform Plan (aka LMS) shows that their emphasis is first on 'sustainable solvency' which is to say putting Social Security on a new pay-go basis over the Infinite Future, secondarily 'fiscally responsible' which they define as minimizing future Fund Borrowing, thirdly on 'economically beneficial' which translates to increased national savings. But at no point if there any real emphasis on return to actual beneficiaries, all pay more and get less and all the benefits are shifted outwards and onwards.

So we cannot dismiss the profit motive OR the desire to minimize the external tax burden to finance Social Security. They are both present. But historically opposition to Social Security has been driven by deeper motives, some people led mainly by Friedman in recent decades simply believe the system is "immoral" and that arguments about efficiency and the "nuts and bolts" are just the needed tools to drain the electricity out of the Third Rail of American Politics. So below the fold I am going to give some links and quotes of people who regret we even HAVE a system of Social Retirement.

As the title suggests the foremost proponent of this view was Milton Friedman. In 1999 the rumblings of 'Reform' were getting louder as Republicans saw they were finally see a possibility of gaining control of the White House and so get past Clinton's 'Save Social Security First' and Gore's 'Lockbox'. In April of 1998 Cato published the following Briefing Paper 46 by Friedman SPEAKING THE TRUTH ABOUT SOCIAL SECURITY REFORM. Which 'truth' is summed up as follows:
A privatized SocialSecurity system should not be mandatory. The fraction of a person’s income that it is reasonable for him or her to set aside for retirement depends on that person’s circumstances and values. It makes no more sense to specify a minimum fraction for all people than to mandate a minimum fraction of income that must be spent on housing or transportation. Our general presumption is that individuals can best judge for themselves how to use their resources.
The ongoing discussion about privatizing Social Security would benefit from paying more attention to fundamentals, rather than dwelling simply on nuts and bolts of privatization.
People who wish can examine the details of the Friedman plan, basically it makes implicit debt explicit and then eliminates Social Retirement altogether, he doesn't want your money and he doesn't think anyone can provide a more efficient solution than the market. And Friedman was even more blunt in the following exchange from 2005 Milton Friedman: Eliminate Social Security, Medicaid, Medicare
Friedman, Paul Snowden Russell Distinguished Service Professor Emeritus of Economics at the University of Chicago, shared his economic theories over lunch October 15 at a California restaurant with nearly two dozen alumni and students who are members of the Milton Friedman Group, the student-led organization that promotes Friedman’s free-market approach.
The event gave participants a chance to pose questions that Friedman had fielded for years from critics. “If you’d abolish Social Security for everyone, what would you do with people who are indigent and incapable of taking care of themselves if they didn’t save during their younger days?” asked second-year student Andrew Van Fossen.
“Social Security isn’t a program for them, it’s for everyone,” Friedman replied. “There’s a much stronger case for government having a program for them than for everybody. But if you look at the record, private charity is a much more effective way of helping people.”
“If you’re going to go from where you are to where you want to go, in the process you’re going to have to have programs of that kind to do it,” Friedman continued. “That’s why, in order to get rid of Social Security, you’re going to have to have private accounts.
“What you should do, in my opinion, is to give every person who now has a claim on Social Security bonds equal to the value of his claim, and set him free. Let him save. Let him do what he wants with it. That would not add a dollar to the debt we now have; it would just convert an unfunded debt into a funded debt,” Friedman said.
Van Fossan asked, “If you did that, how would you protect people from making really stupid decisions?”

“I don’t!” Friedman replied. “Why should I?” a response that drew laughter from the group. “You mean freedom does not include the freedom to make a stupid decision?”
Now I would have a little quarrel with that "private charity is a much more effective way of helping people" piece, after all the guy was born in 1912 and experienced the Depression in full, but at least you can't accuse this guy of hiding behind 'intergenerational inequity' or ducking past debt.


Anonymous said...

Of course the underlying argument has nothing to do with efficiency etc; it is fundamentally an argument about having an insurance pool versus having self insurance.

The argument against the insurance pool is advanced to the benefit of those for whom self-insurance is likely to be cheaper.

Social Security is not a pension system based on individual savings; it is an insurance system against poverty due to old age (etc.); it is based on an insurance pool approach.

For those least likely to become poor, the insurance premium of a pool is likely to be higher than that of self-insurance, so they obviously want out. No more and no less than the usual self-selection issue.

When Friedman says that it is not a program for the poor, but for everybody, he is dissembling: because it is indeed insurance, where the premium is paid for by everybody, but the benefits go mostly to the poor.

Also, nobody is force to contribute to USA Social Security; people do have the freedom to "make really stupid decisions" and have private accounts and not contribute to them. I for one haven't paid a cent to USA Social Security (I am neither a resident nor a citizen of the USA).

Indeed anybody who thinks that the USA Social Security approach of using an insurance pool against poverty is not in their best interests can very well choose to go live in another nation where there are optional private accounts. Nobody is forced to put a cent into USA Social Security.

Anonymous said...

Most of our population, according to the Wall St. Journal article, have next to nothing in the bank and will live on Social security.

Most have worked all their lives but in our system the people are used for the system and then laid off in recession. The average working poor or lower middle class person (the majority of us)very much needs social security.

After recent stock market losses, private accounts have no validity.
Add to this the fact that women in their roles as caretaker of children and the elderly and husbands, etc. do not get credit for this. In cities half are divorced and need social security.

Anonymous said...

It's a tax folks. Used to be that a fairly large number of workers paid a small tax and supported one person on social security. Now social security is at the point where one working person pays for one on social security. That's next, social security moves a recipient into the taxpayers house? WAKE UP. The system is bankrupt and promises have been made by congress on every future dollar, to the tune of many promises against each future dollar...if tax revenues recover from congress' Fannie/Freddie debacle.

People should assume the responsibility of their own retirement however they can and at whatever level they see fit. Set aside their own money for their own old age. Federal entitlements are bankrupting the country and burdening young workers so that they cannot provide for their own retirement. How is this just?! The reality of funds required to pay all the promises made by government over future generations is lied about, obfuscated, and hidden. The SS system was a Ponzi scheme when it was first thought of and it's a Ponzi scheme now, requiring more and more people working to pay into the system as long as it exists, but now we have fewer and fewer workers paying into it vs more and more on the system and a tidal wave of new ones coming (boomer generation) -- wake up. The only difference about this Ponzi scheme is that it's done by government (congress), they don't go to jail as they should, but they are criminals nevertheless.

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