The Independent Institute

 
        

The Program No One Dares to Question: Social Security



I recently exchanged letters with Joe Davidson, columnist for the Washington Post, about the Social Security program, in which I raised a central problem with this program, a defect consistently ignored by all its supporters. (Incidentally, the $1,000 reward I promised Mr. Davidson—which he did not attempt to claim—remains open to any staff member of the Washington Post and to any employee of the U. S. Social Security Administration). The correspondence is as follows:

September 24, 2014

 

Dear Joe,

In your August 15, 2014 column in the Washington Post, you urged readers to “celebrate” Social Security as “a venerable program that reflects what government should do, making life better for the nation’s elderly. . . .”

As a political scientist, I have spent many years researching public policies and the reasons why people approve of them. My experience in this field has led me to the conclusion that support for government transfer programs is not based on rational assessment, but instead springs from illusions. I am writing to see if this conclusion applies to your support of the Social Security program.

Any system of taxing the public and then attempting to return the funds in the form of benefits involves economic waste, both on the taxation side and on the disbursement side. For Social Security, these costs include: 1) the disincentive costs of taxation (people work less since you are reducing their wages); 2) the disincentive effects of payments (people work less in order not to lose benefits and people work less because they don’t “have to”); 3) tax compliance costs (paperwork); 4) benefit compliance costs (the paperwork to get and maintain benefits); 5) litigation costs (the time and money devoted to complaints, hearings, and lawyers, on the tax side; 6) litigation costs on the benefit side; 7) the losses associated with inflexible benefits (for example, you can’t use your Social Security “wealth” to buy a motel to run, which would give you greater retirement income).

How large are the indirect and hidden costs of the Social Security transfer system? It might be, for example, that the waste factor in Social Security is 200 percent, compared to a system of simply allowing workers to privately save for their own retirement. Instead of receiving today’s benefit of $1,294 a month under Social Security, the average retiree would therefore have an income of $3,882 per month. If this were the case, a responsible columnist should be deploring Social Security for “making life markedly worse for the elderly.”

Does Social Security have such high overhead costs? Unfortunately, few ever ask this question. Most people are victims of what I call the illusion of the frictionless state, the belief that government, a superior, God-like entity, can transfer resources with negligible overhead cost. Under the influence of this illusion, generations of activists have championed transfer programs, and generations of administrators fail to compile estimates of the indirect costs in their transfer programs. And generations of pro-government columnists embrace them without the slightest inkling that these programs might be destroying wealth on a vast scale.

My suspicion is that you are a victim of the illusion of the frictionless state. I invite you to refute this idea by identifying a study that seriously attempts to estimate Social Security’s indirect and social costs (including, at least, the seven costs I mentioned above), a study that shows these costs are rather low. I am so sure that you will be unable to identify any such study, that I will send you a check for $1,000 by return mail if you can produce one. I will also send you an apology for having supposed that your support for the Social Security program is intellectually shallow.

 

Sincerely yours,

James L. Payne

 

PS: I am hoping to publish this letter in article form. I will be happy to include your reply in the article (100-word limit).

 

Mr. Davidson replied (on October 3, 2014):

Hi Jim,

I don’t choose to get into a discussion about Social Security.

I do appreciate your letter. May I publish it? All letters go through an editing process. Your letter likely would be shortened.

Thank you. Best, Joe

 

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