Bryan Caplan  

Means-Testing Social Security: The Cohen-Friedman Debate, I

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Did you know that in 1972, Milton Friedman debated former HEW Secretary Wilbur Cohen on means-testing Social Security?  Until two weeks ago, I sure didn't.  To be honest, neither debater is at the top of his game.  Cohen makes a lot of "The status quo must be fine because it's so popular" claims, and Friedman keeps harping on the fact that Social Security is redistribution masquerading as "insurance."  But it's still a fascinating exchange.  Today let's start with the Cohen highlights.

Cohen twice rejects means-testing on political economy grounds.  In his main statement, he claims the following without evidence or even explanation:
I also oppose any wholesale substitute for the social security system, whatever its name (such as a negative income tax, a guaranteed income or what have you) that makes payments only to the poor. A program for the poor will most likely be a poor program.
But in his rebuttal, at Cohen fleshes out his story.
...Mr. Friedman attacks the idea that American social security is primarily a system of redistribution of income to middle income people. Actually I think he is probably right about that. But, that is part of the system's political sagacity. Since most of the people in
the United States are in the middle income, middle class range, social security is a program which appeals to them. Anyhow, to the extent that he is right that there is a transfer of money from low income people to middle income people, the situation could be improved by certain changes in the financing. You don't have to do away with the entire social security system to rectify that.

But let me emphasize that the reason why the Office of Economic Opportunity and other such programs don't get appropriations, don't get support from the taxpayer, is simply that they do not appeal to the middle class, middle income person. True, if you are an economist, you may exclude all matters of politics from your thinking. But to do so is not reality, Milton. [Laughter.]

And so I say that the essence of social security, with its appeal to middle income people, is desirable and those things that are legitimately criticized about the system could easily be remedied by certain changes. My major objection to the negative income tax as a complete substitute for social security is that I am convinced that, in the United States, a program that deals only with the poor will end up being a poor program. There is every evidence that this is true. Ever since the Elizabethan Poor Law of 1601, programs
only for the poor have been lousy, no good, poor programs. And a program that is only for the poor-one that has nothing in it for the middle income and the upper income-is, in the long run, a program the American public won't support.
You'd think these admissions would generate massive cognitive dissonance in Cohen.  His view really does amount to, "Trickery is the only way to provide for the needy.  Social Security is popular because voters simple-mindedly focus on their gross benefits, instead of their net benefits."  But Cohen is perfectly fine with this trickery - or, as he calls it, "rhetoric."
Mr. Friedman calls a lot of the things he doesn't like about social security rhetoric. And that gets me to a point I want to stress. My point is that economists do not determine all of the choices and options and attitudes prevailing in this nation. People do live by rhetoric. You can't understand what goes on in the United States if you don't understand something about
rhetoric. And think of all the people in this audience who would be out of a job if we didn't have such a thing as rhetoric. [Laughter.]

I believe in rhetoric because it makes a lot of things palatable that might be unpalatable to economists. [Laughter.]
In any case, Cohen is just factually wrong about the sustainability of expensive, means-tested programs.  The American public supports vast spending on programs that target the poor, and has done so for decades.  Medicaid alone costs hundreds of billions of dollars a year.  And if you're inclined to pardon Cohen for mistakenly forecasting the future, remember that when he spoke, plenty of expensive means-tested programs had been around for decades. 

I rarely criticize economists for underestimating the American voter.  But Cohen forces my hand.  Trickery does sustain universal social programs, but transparently selective social programs can and do flourish at the same time.  As former HEW secretary, he must have known this, so I guess we should interpret his mistakes as "rhetoric."

COMMENTS (7 to date)
ThomasH writes:

I think the 2 most important and desirable feature of SS is a) that it provides an annuity that the person cannot outlive and 2) it is extremely unlikely that without compulsion many people would save as much for retirement as SS provides. I do lament that the financing of the scheme was not by a VAT or consumption tax that would be less sensitive to changing demographics and would not discourage employment as a wage tax must to some extent.

sam writes:

The defense of SS is fundamentally what SSC would call a motte-and-bailey defense.

The motte is a backstop program for those who are lucky enough to outlive their prudent savings or unlucky enough to retire at the bottom of the market. Given the median 401k balance at retirement is approx $250k, this is a very small number of people.

The bailey is a welfare program that takes from earners who have high incomes and gives to retirees who were improvident with their savings.

When SS is attacked, the defenders retreat to their rhetorical motte and say "you don't want to provide a backstop for those who saved prudently and lived long enough to outlast their savings!"

Once SS is successfully defended, the defenders return to what they find productive, which is income redistribution from the provident and productive to the improvident and unproductive.

LD Bottorff writes:

The bailey is a welfare program that takes from earners who have high incomes and gives to retirees who were improvident with their savings.

I'm afraid the bailey is actually a fountain of money used by politicians to buy votes by scaring the people who are retired or are approaching retirement. Any politician who proposes a reasonable reform to Social Security will be attacked much more viciously than you have described. "You want to rob people of the investment they've made in good faith through a lifetime of working." "You want to put granny in the poor house."
Sam, your point is excellent; I'm just praising you with faint criticism.

ThomasH writes:

Both features are desirable although personally (in the present understanding of SS as a savings program), I think forcing the taxpayer to consume less than she would have otherwise in order to pay for a lifetime annuity is more important than the redistribution from higher-income retirees to lower income retirees.

Floccina writes:

Social Security is a welfare program that was disguised as Ponzi scheme so the voters would support it.

I think SS should give every person over 65 $200/week. The Politicians should slowly move toward that goal. I think people would support it, I think that in Australia the Gov. part of their retirement system works that way.
I do not think we USAers that different from Australians when it comes to charity.

Floccina writes:

SS is already progressive. Readers may find this interesting:

The Social Security benefit formula has incorporated some measure of progressivity almost since the program's inception. As early as 1939, amendments to the original Social Security Act stipulated that monthly benefits replace a higher proportion of preretirement earnings for people with lower earnings compared with those with higher earnings (Martin and Weaver 2005). Throughout the program's history, benefit adequacy—promoted through a progressive benefit formula—has been balanced with equity, the goal that benefits increase with contributions.

Michael Rulle writes:

Means testing is just another way to tax those with higher incomes. We have become very cynical about the nature of Social Security, and with good reason.

My comments assume that Social Security is, affectively, by intent, forced savings. I will pretend I believe forced savings are a good thing.

The payments (not taxes) I make into the SS system should be viewed the same as any pension plan. That is how the Federal Government tricked people into voting for it in the first place. The money (like in Singapore), should have been invested in real securities.

However, with all that "excess" money starting to come in back in the 60's and 70's it was just too enticing for the pols to leave alone. So we went literally big time into "pay as you go". Approximately $6 trillion dollars plus has been vacuumed out of Social Security over the last 50 years or so. We have an accounting gimmick called the Social Security trust fund which tracks this misallocated money.

Imagine if your employer did that with your pension money. They would be called Enron. All pension funds, of course, make true investments (company stock for pensions should not be allowed---it's like Social Security or Enron)---by and large pension funds are highly diversified.

Now I know you all know this and more. I am surprised to learn that Friedman had already accepted the de Facto corruption of the SS system and, therefore, viewed it as a transfer payment scheme, which of course it has become.

But that was never the intent. I think there is a way out----think "good bank, bad bank". Sell chunks of real treasuries into the market to fund the next X years of SS payments, as we gradually get younger people out of the system. Someone has to lose, the money is gone. I say spread it out over generations. Investors will at least know we are ending the system. I think that would be bullish for economic expectations.

We either accept that we have already spent and/or committed the money and we pay it back over 50-100 years----or we default on our obligations which are what all these schemes are about (means testing, later start dates, etc.,).

My impression is that all the "wise men" seem to favor the latter these days. Perhaps I am wrong.

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