Who was Milton Friedman and what did he say about Social Security Reform? (Part 3)

If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.
Milton Friedman

 Ep. 4 – From Cradle to Grave [2/7]. Milton Friedman’s Free to Choose (1980)

Since the Depression years of the 1930s, there has been almost continuous expansion of governmental efforts to provide for people’s welfare. First, there was a tremendous expansion of public works. The Social Security Act followed close behind. Soon other efforts extended governmental activities in all areas of the welfare sector. Growth of governmental welfare activity continued unabated, and today it has reached truly staggering proportions.

Traveling in both Britain and the U.S., Milton Friedman points out that though many government welfare programs are well intentioned, they tend to have pernicious side effects. In Dr. Friedman’s view, perhaps the most serious shortcoming of governmental welfare activities is their tendency to strip away individual independence and dignity. This is because bureaucrats in welfare agencies are placed in positions of tremendous power over welfare recipients, exercising great influence over their lives. Because people never spend someone else’s money as carefully as they spend their own, inefficiency, waste, abuse, theft, and corruption are inevitable. In addition, welfare programs tend to be self-perpetuating because they destroy work incentives. Indeed, it is often in the welfare recipients’ best interests to remain unemployed.

The American economist Milton Friedman challenged the Keynesian orthodoxy with his monetarist theories.

Milton Friedman congratulated by President Ronald Reagan. © 2008 Free To Choose Media, courtesy of the Power of Choice press kit

In this series I want to both look  closely at who Milton Friedman was and what his views were about Social Security reform. Here is the second portion of an autobiography from Nobelprize.org:

In economics, I had the good fortune to be exposed to two remarkable men: Arthur F. Burns, then teaching at Rutgers while completing his doctoral dissertation for Columbia; and Homer Jones, teaching between spells of graduate work at the University of Chicago. Arthur Burns shaped my understanding of economic research, introduced me to the highest scientific standards, and became a guiding influence on my subsequent career. Homer Jones introduced me to rigorous economic theory, made economics exciting and relevant, and encouraged me to go on to graduate work. On his recommendation, the Chicago Economics Department offered me a tuition scholarship. As it happened, I was also offered a scholarship by Brown University in Applied Mathematics, but, by that time, I had definitely transferred my primary allegiance to economics. Arthur Burns and Homer Jones remain today among my closest and most valued friends.

Though 1932-33, my first year at Chicago, was, financially, my most difficult year; intellectually, it opened new worlds. Jacob Viner, Frank Knight, Henry Schultz, Lloyd Mints, Henry Simons and, equally important, a brilliant group of graduate students from all over the world exposed me to a cosmopolitan and vibrant intellectual atmosphere of a kind that I had never dreamed existed. I have never recovered.

Personally, the most important event of that year was meeting a shy, withdrawn, lovely, and extremely bright fellow economics student, Rose Director. We were married six years later, when our depression fears of where our livelihood would come from had been dissipated, and, in the words of the fairy tale, have lived happily ever after. Rose has been an active partner in all my professional work since that time.

Ep. 4 – From Cradle to Grave [3/7]. Milton Friedman’s Free to Choose (1980)


Milton Friedman wrote an excellent article, “Speaking the truth about Social Security Reform,” April 12, 1999, Cato Institute and I will posting portions of that article in the next few days.  Milton Friedman, winner of the 1976 Nobel Prize in Economics, was a senior research fellow at the Hoover Institution. Originally published in the New York Times January 11, 1999. Here is the third portion:

The Myth of Transition Cost

The link between the payroll tax and benefit

payments is part of a confidence game to convince

the public that what the Social Security

Administration calls a social insurance program

is equivalent to private insurance; that, in the

administration’s words, “the workers themselves

contribute to their own future retirement benefit

by making regular payments into a joint fund.”

Balderdash. Taxes paid by today’s workers are

used to pay today’s retirees. If money is left over,

it finances other government spending—though,

to maintain the insurance fiction, paper entries are

created in a “trust fund” that is simultaneously an

asset and a liability of the government. When the

benefits that are due exceed the proceeds from

payroll taxes, as they will in the not very distant

future, the difference will have to be financed by

raising taxes, borrowing, creating money, or

reducing other government spending. And that is

true no matter how large the “trust fund.”

The assurance that workers will receive benefits

when they retire does not depend on the particular

tax used to finance the benefits or on any

“trust fund.” It depends solely on the expectation

that future Congresses will honor promise made

by earlier Congresses—what supporters call “a

compact between the generations” and opponents

call a Ponzi scheme.

The present discounted value of the promises

embedded in the Social Security law greatly

exceeds the present discounted value of the

expected proceeds from the payroll tax. The difference

is an unfunded liability variously estimated

at from $4 trillion to $11 trillion—or from

slightly larger than the funded federal debt that is

in the hands of the public to three times as large.

For perspective, the market value of all domestic

corporations in the United States at the end of

1997 was roughly $13 trillion.

To see the phoniness of “transition costs” (the

supposed net cost of privatizing the current Social

Security system), consider the following thought

experiment: As of January 1, 2005, the current

Social Security system is repealed. To meet current

commitments, every participant in the system will

receive a governmental obligation equal to his or

her actuarial share of the unfunded liability.

For those already retired, that would be an

obligation—a treasury bill or bond—with a market

value equal to the present actuarial value of

expected future benefits minus expected future

payroll taxes, if any. For everyone else, it would be

an obligation due when the individual would have

been eligible to receive benefits under the current

system. The maturity value would equal the present

value of benefits the person would have been

entitled to, less the present value of the person’s

future tax liability, both adjusted for mortality.

The result would be a complete transition to a

strictly private system, with every participant

receiving what current law promises. Yet, aside

from the cost of distributing the new obligations,

the total funded and unfunded debt of the United

States would not change by a dollar. There are

no “costs of transition.” The unfunded liability

would simply have become funded. The compact

between the generations would have left as a

legacy the newly funded debt.

How would that funded debt be paid when it

came due? By taxing, borrowing, creating money,

or reducing other government spending. There

are no other ways. There is no more reason to

finance the repayment of this part of the funded

debt by a payroll tax than any other part. Yet

that is the implicit assumption of those who

argue that the “costs of transition” mean there

can be only partial privatization.

The payroll tax is a bad tax: a regressive tax

on productive activity. It should long since have

been repealed. Privatizing Social Security would

be a good occasion to do so.


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