Friedman on Social Security Reform

November 5, 2010

by Chidem Kurdas

This may be a good time to revisit Milton Friedman’s proposal for reforming all entitlement programs and social security, in one fell swoop. His idea goes back several decades but is no less powerful in its simplicity. A serious discussion on reform may now start with the Roadmap put forth by Wisconsin Congressman Paul Ryan, the next chairman of the House Budget Committee.  

Mr. Ryan proposes to partially privatize social security. That’s reasonable enough. But there should be some thought given to an alternative, namely the negative income tax.  This would provide a safety net for everybody—comprehensive and totally egalitarian. At a time when many Americans are suffering persistent economic hardship, the need for such a safety net is glaring.

The negative income tax is a replacement for myriad programs, from public housing to food stamps to social security. Anybody whose income falls below their tax deductions would automatically receive a check. This would insure that everybody gets a minimum income.

One of the great virtues of the negative income tax is that it requires no special bureaucracy to administer it. But this virtue is a political liability, because the bureaucracies that oversee the many existing programs and various other interests that benefit resist any proposal to replace those programs. After describing how the negative income tax would work, Friedman wrote: “This is a fine dream, but unfortunately it has no chance whatsoever of being enacted at present.”

Three Presidents – Nixon, Ford and Carter – had considered or recommended elements of a negative income tax, but as an addition to existing programs rather than a substitute for them. Friedman opposed those specific applications because the negative income tax would do more harm than good as another rag in a ragbag. 

But he observed that “what is not politically feasible today may become politically feasible tomorrow”. The gradual transition he envisioned would start by repealing the payroll tax— which is a drag on job creation. There should be no change for existing Social Security beneficiaries (and those over 55, a provision in Mr. Ryan’s Roadmap).

For more information on the negative income tax, see Free To Choose, pp. 120-127.

19 Responses to “Friedman on Social Security Reform”

  1. James Pier Says:

    The latter arrangement–the negative income tax in addition to what is already in place–is what we have now with the Earned Income Tax Credit, is it not?

  2. Richard Ebeling Says:

    If I may suggest for a read, Henry Hazltt wrote a thoughtful and highly critical analysis of Friedman’s proposal for a negative income tax — from a free market perspective, of course — in a chapter in his book, “Man vs. the Welfare State” (1969), Ch. 12, pp. 84-100.

    The book is available in a PDF online:

    http://mises.org/resources/2974/Man-vs-The-Welfare-State

    His analysis is worth considering before a negative income tax is proposed as a policy alternative.

    Richard Ebeling

  3. John Says:

    I don’t understand all of the discussion about S.S. The solution is simple, if the U.S. government can spend billions or even trillions on foreign wars then they can ante up the funds to take care of our own citizens by providing S.S. what it needs. The priorities of the country are all messed up. Every dead soldier is one less contributor to our S.S. system so by ending the wars we save on two fronts.
    Why does S.S. need to be self-supporting when nothing else is?

  4. chidemkurdas Says:

    Obviously, the current arrangement is not what Friedman advocated. His idea was to replace a variety of in-kind subsidies like public housing as well as cash payments with one automatic system.

  5. chidemkurdas Says:

    Re Henry Hazltt: The basic issue he raises is that there is a dilemma between making the subsidy too low so that it is inadequate vs. too high so that it destroys the incentive to work. No doubt that is a dilemma. But it is not specific to the negative income tax. As Hazltt writes:
    “The obstinate two-sided problem we face is this: How can we mitigate the penalties of misfortune and failure without undermining the incentives to effort and success?”

  6. chidemkurdas Says:

    Re social security vs. wars: so the logic is, having spent so much on wars, we might as well stop worrying about money and spend away. Is that it?

    We’re supposed to spend another trillion dollars on the new medical entitlements. I suppose I can’t help thinking about who’s going to pay for all this.


  7. John asks a good question. Chidem is too moderate.:)

    The point I would emphasize is that SS is unsustainable. It’s a Ponzi scheme.

    When Social Security was passed, the life expectancy of a white male was around 65. The expectation was that, on average, no one would collect. SS was politics not economics. (Black males didn’t get in the money until the 1950s.)

    The solution is obvious, and it is gradually to raise the retirement age above life expectancy, somewhere around 75. Why should people get to retire at public expense? Again, with an aging population, it’s not possible.

    My plan has other benefits. The savings rate will increase to Asian levels, and the problem of global inbalances will be solved.

    Obviously I have no plans to run for public office.

  8. Seth Says:

    Jerry’s last sentence sums it up. The primary purpose of SS has been to buy votes with OPM.

  9. Allan Walstad Says:

    “The solution is obvious, and it is gradually to raise the retirement age above life expectancy, somewhere around 75.”

    Or just raise it, say, 3 months a year, from here on out. People within a few years of retirement will only have to work a year or too longer. Those somewhat younger can may want to consider some extra savings to bridge the gap. But young people just entering the work force will understand that saving for their retirement is their responsibility, as is proper in a free society. And as the number of people collecting decreases, the SS tax can be decreased too, leaving younger folks with more of their own money to save as they see fit. This is a very straightforward way to get out from under SS before it crushes us, and it spreads the pain (necessary medicine) around pretty evenly.

  10. James Pier Says:

    What I find remarkable is that anyone would suggest that “the solution is obvious.” This is both an economic and a political problem, and it has been intractable for at least 30 years. If there were an obvious solution, it would have been implemented. There are many economic solutions, but none of them can be implemented unless they are made politically acceptable. That is the hard work yet to be done. The average American must somehow learn that entitlements are a bad deal for the great majority of Americans, that they cost much more in productivity and liberty than they pay in benefits, that they rob individuals of the freedom to choose how to spend their earnings, that they are essentially based on fraudulent premises, and that the longer we wait to make significant changes, the more painful those changes become. The person who can lead the efforts to get the word out deserves the Congressional Medal of Honor. Regrettably, the entrenched interests that depend on beneficiaries of entitlements for their positions continue to shout down any attempt at reasonable debate about solutions, employing demagoguery of the worst kind. These people must be discredited, and courageous leaders such as Paul Ryan must be given political support.

  11. Allan Walstad Says:

    “If there were an obvious solution, it would have been implemented.”

    Through the political process? Not necessarily.

    “There are many economic solutions, but none of them can be implemented unless they are made politically acceptable.”

    This is not at all inconsistent with the solution being obvious. The whole problem is with entrenched political interests that resist eliminating counterproductive political interference in the market.

  12. chidemkurdas Says:

    So, there seems to be agreement among ThinkMarkets commentators that reasonable economic solutions exist but interest group politics makes it near impossible to change the system.

    I think there is another issue. For all these decades millions of people have assumed Social Security will be there for them. After all, we’ve all been paying into it with the assurance that it will provide, well, “security”. This is now built into the fabric of society. To have any chance, a reform will have to factor that in by exempting the Baby Boom generation from any changes.

  13. James Pier Says:

    “If there were an obvious solution, it would have been implemented.”

    Allan Walstad said:

    “Through the political process? Not necessarily.”

    My point was that a “solution” that is not politically feasible is not a solution, it is just a good idea. The political environment must be taken into consideration.

    chidemkurdas said:

    “For all these decades millions of people have assumed Social Security will be there for them. ”

    I agree to an extent. Those of us who came of age after 1980 or so have been aware that there were solvency issues, and I believe many of us have adjusted our expectations accordingly. The ground must be prepared for a fundamental change of expectations.

  14. chidemkurdas Says:

    “The ground must be prepared for a fundamental change of expectations.” Yes. I’d bet that despite talk of solvency issues over the years, most people already in middle age expect to receive what they were told they’d receive.

  15. Allan Walstad Says:

    “My point was that a “solution” that is not politically feasible is not a solution…”

    Of course it is a solution. The challenge is to overcome political impediments in the short term, and limit counter-productive political interference in the market in the long term. If that can’t be achieved, then it’s not for lack of perfectly good solutions, its because of obstacles to the implementation of perfectly good solutions. For example, the solution to deficits is to stop spending more than is being taken in. It is no less a solution just because political forces stand in the way of cutting spending.

  16. chidemkurdas Says:

    Can the politics be disentangled from the economics? Political interests are in large part — though certainly not all — based on economic interests. Since the growth of government creates interest groups that benefit from that growth, the huge growth we’ve witnessed in recent years means it has become even more difficult to reduce spending.

  17. chidemkurdas Says:

    Following from that, there is a lot of push to increase taxes, in some form or another, whether explicitly justified as soaking-the-rich or possibly hidden in the price of something everybody uses. Thus the proposal by Obama’s deficit commission to add a tax to oil. If this happens, gasoline would become more expensive, and many people might not notice the extra tax unless their attention is drawn to it.

  18. John Papola Says:

    @Jerry,

    What “problem” of “global imbalances”?


  19. @John Papola,

    I think capital flows are a symptom not a problem. But they’d diminish as more investment in the US was financed by domestic saving.


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