Who was Milton Friedman and what did he say about Social Security Reform? (Part 4)

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

Arnold Schwarzenegger did  the opening introduction to the film series “Free to Choose” by Milton Friedman, but then  Arnold abandoned the principles of Friedman!!!!

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

Many people want the government to protect the consumer. A much more urgent problem is to protect the consumer from the government.
Milton Friedman

 

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 fourth portion of an autobiography from Nobelprize.org:

Thanks to Henry Schultz’s friendship with Harold Hotelling, I was offered an attractive fellowship at Columbia for the next year. The year at Columbia widened my horizons still further. Harold Hotelling did for mathematical statistics what Jacob Viner had done for economic theory: revealed it to be an integrated logical whole, not a set of cook-book recipes. He also introduced me to rigorous mathematical economics. Wesley C. Mitchell, John M. Clark and others exposed me to an institutional and empirical approach and a view of economic theory that differed sharply from the Chicago view. Here, too, an exceptional group of fellow students were the most effective teachers.

After the year at Columbia, I returned to Chicago, spending a year as research assistant to Henry Schultz who was then completing his classic, The Theory and Measurement of Demand. Equally important, I formed a lifelong friendship with two fellow students, George J. Stigler and W. Allen Wallis.

Allen went first to New Deal Washington. Largely through his efforts, I followed in the summer of 1935, working at the National Resources Committee on the design of a large consumer budget study then under way. This was one of the two principal components of my later Theory of the Consumption Function.

The other came from my next job – at the National Bureau of Economic Research, where I went in the fall of 1937 to assist Simon Kuznets in his studies of professional income. The end result was our jointly published Incomes from Independent Professional Practice, which also served as my doctoral dissertation at Columbia. That book was finished by 1940, but its publication was delayed until after the war because of controversy among some Bureau directors about our conclusion that the medical profession’s monopoly powers had raised substantially the incomes of physicians relative to that of dentists. More important, scientifically, that book introduced the concepts of permanent and transitory income.

The catalyst in combining my earlier consumption work with the income analysis in professional incomes into the permanent income hypothesis was a series of fireside conversations at our summer cottage in New Hampshire with my wife and two of our friends, Dorothy S. Brady and Margaret Reid, all of whom were at the time working on consumption.

I spent 1941 to 1943 at the U.S. Treasury Department, working on wartime tax policy, and 1943-45 at Columbia University in a group headed by Harold Hotelling and W. Allen Wallis, working as a mathematical statistician on problems of weapon design, military tactics, and metallurgical experiments. My capacity as a mathematical statistician undoubtedly reached its zenith on V. E. Day, 1945.

Ep. 4 – From Cradle to Grave [5/7]. 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 fourth portion:

Should Social Security Be Mandatory?

Should a privatized system be mandatory? The

present system is; it is therefore generally taken

for granted that a privatized system must or

should be as well.

The economist Martin Feldstein, in a 1995

article in the

Public Interest

, argued that contributions

must be mandatory for two reasons. 

“First, some individuals are too shortsighted to  

provide for their own retirement,” he wrote.  

“Second, the alternative of a means-tested program  

for the aged might encourage some lowerincome  

individuals to make no provision for their  

old age deliberately, knowing that they would  

receive the means-tested amount.”  

The paternalism of the first reason and the  

reliance on the extreme cases of the second are 

equally unattractive. More important, Professor  

Feldstein does not even refer to the clear injustice  

of a mandatory plan.  

The most obvious example is a person with a  

terminal disease who has a short life expectancy  

and limited financial means, yet would be  

required to use a significant fraction of his or her  

earnings to accumulate what is almost certain to  

prove a worthless asset.  

More generally, 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.  

Mr. Feldstein simply asserts that in this particular  

case the government knows better.  

In 1964, Barry Goldwater was much reviled  

for suggesting that participation in Social Securi-

ty be voluntary. I thought that was a good idea

then; I still think it is.

 Barry Goldwater’s picture

I find it hard to justify requiring 100 percent of

the people to adopt a government-prescribed

straitjacket to avoid encouraging a few “lowerincome

individuals to make no provision for their

old age deliberately, knowing that they would

receive the means-tested amount.” I suspect that,

in a voluntary system, many fewer elderly people

would qualify for the means-tested amount from

imprudence or deliberation than from misfortune.

_______________________________________

The problem with social security  

David John, a Senior research Fellow at the Heritage Foundation, explains his position on Social Security as it relates to taxes and health care. He suggests it would be a good solution for the government to raise the age of retirement.

____________________________________________

I have no illusions about the political feasibility

of moving to a strictly voluntary system. The

tyranny of the status quo, and the vested interests

that have been created, are too strong. However,

I believe that the ongoing discussion about

privatizing Social Security would benefit from

paying more attention to fundamentals, rather

than dwelling simply on the nuts and bolts of privatization.

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