Tuesday, April 12, 2005

Milton Friedman on Social Security

Q: Do you believe that Social Security should be privatized, or no?

A: Yes, I believe that Social Security should be privatized. However there are also other things they can do with it.

Q: How do you believe the system should be fixed, and not just Social Security, but perhaps also Medicare, which seems to be a greater and more prevalent problem?

A: Well first of all, I don't believe there should be a Social Security system of our present kind. Our current Social Security system is a Ponzi game...in which the young pay in to pay the current expenses of the old. It's also being misrepresented, as if it were a form of insurance, that when you pay Social Security taxes, you are paying money which is being put away for your own benefit. That is not the case. The money that you pay goes out immediately, either to pay pensions to current retirees or to pay other expenses of government. There are no real assets corresponding to it...

One of the interesting things is, everybody talks about the problems of Social Security as the fact that the number of workers are going up less rapidly than the number of retirees. Well if that's the problem, you would think it would also effect life insurance companies, and yet haven't heard any problems with the life insurance companies, have you?

The ideal situation would be that we abolish Social Security and let people save for their own retirement.

I think its disgraceful that, well, take the case that always seems to be the most extreme. You have a young man who has AIDS. He is seriously ill and dying at age 50 at the latest, and when he's 40, the government comes along and says we gotta take a sixth of your income and put it aside for your old age. How absurd can you be?

Social Security has become a kind of an icon, an untouchable, and yet it's basic premise is flawed.

Q: Knowing that it won't be abolished, how would you propose to save Social Security?

A: What I would do is link the benefits to the price index, not a wage index. I would do that the whole way down and not just with the upper incomes. That would solve a good part of the problem. I would raise the date of retirement, and I would go in for private accounts, but on a larger scale. I would allow workers to keep 6 percent of their taxes.

Q: If the federal government does move to private accounts, does the $3 trillion that President Bush says he would have to borrow to get that moving cause a greater stress on the American economy?

A: No, because we already have that obligation. What we are talking about is replacing an unfunded debt with funded debt. We already have an obligation to all the people like myself who are currently on Social Security. The difference is it is not written out as funded debt. So when you talk about borrowing, they are not really changing the total government debt, they are only changing how much they recognize, and what is open and above board and how much of it is hidden in other funding.

From Donald Luskin

Update: You can read the whole interview here.