The impetus for broader social insurance reform comes from the recognition that existing programs have substantial undesirable effects on incentives and therefore on economic performance. Unemployment insurance programs raise unemployment. Retirement pensions induce earlier retirement and depress saving. And health insurance programs increase medical costs.
...Noneconomists who write about social insurance programs often implicitly assume that social insurance programs do not affect the behavior of beneficiaries or the overall performance of the economy. Evidence shows that the opposite is true. Social insurance programs have important and sometimes harmful effects on the economy that are not fully recognized by the public, the Congress, or the politically responsible officials.
To me, this is the point that journalists most often miss about the Social Security debate. They tend to get so caught up in the distributive aspects of Social Security--how it affects the Budget, whether benefits are going up or down, or what have you--that they forget the incentive effects. It is the duty of economists to keep those effects in focus.
How does Social Security affect work and thrift? Feldsten says,
Who among you is confident about even the most basic Social Security rules that determine benefits at retirement? If you are a man, what benefit would your wife receive if she collects on her own rather than as your spouse? How would that change if she earned more or worked another year? If she retires at age 62 rather than 65? I’m told that there are more than 2500 separate rules in the Social Security handbook.
The complexity of the rules weakens the perceived link between the payroll taxes paid and subsequent benefits. Many employees may simply regard their Social Security payroll tax as similar to the income tax, thereby increasing the perceived marginal tax rate and raising thedeadweight loss of the tax.
I recommend reading Feldstein's entire essay.
For Discussion. How can economic analysis improve the design of social insurance programs?