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Milton Friedman on Social Security

To preserve the fiction that Social Security is insurance, however, federal government interest-bearing bonds of a corresponding amount have been deposited in a so-called trust fund. That is, one branch of the government, the Treasury, has given an interest-bearing IOU to another branch, the Social Security Administration. Each year thereafter, the Treasury gives the Social Security Administration additional IOUs to cover the interest due. The only way that the Treasury can redeem its debt to the Social Security Administration is to borrow the money from the public, run a surplus in its other activities, or have the Federal Reserve print the money—the same alternatives that would be open to it to pay Social Security benefits if there were no trust fund. But the accounting sleight of hand of a bogus trust fund is counted on to conceal this fact from a gullible public.

Context. From an article on President Clinton’s proposal to invest part of the Social Security funds in the stock market. Just before, he explains that Congress has collected more in Social Security taxes than current benefits required, though less than the future liability it was incurring, and that “the excess revenue has been spent in the ordinary course of government business.”

Social Security Socialism
Column, 1999, The Wall Street Journal, January 26, 1999; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
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Milton Friedman, “Social Security Socialism” (The Wall Street Journal, January 26, 1999; reprinted with minor editorial changes in Hoover Digest 1999 No. 2, 1999). https://miltonfriedman.org/quotes/social-security-trust-fund-sleight-of-hand-1999

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He also said

  1. The link between the payroll tax and benefit payments is part of a confidence game to convince the public that what the Social Security Administration calls a social insurance program is equivalent to private insurance, in that, in the Administration’s words, “the workers themselves contribute to their own future retirement benefit by making regular payments into a joint fund.” Balderdash. Taxes paid by today’s workers are used to pay today’s retirees. If money is left over, it finances other government spending—though, to maintain the insurance fiction, paper entries are created in a “trust fund” that is simultaneously an asset and a liability of the government. When the benefits that are due exceed the proceeds from payroll taxes, as they will in the not very distant future, the difference will have to be financed by raising taxes, borrowing, creating money, or reducing other government spending. And that is true no matter how large the “trust fund.” The assurance that workers will receive benefits when they retire does not depend on the particular tax used to finance the benefits or on any “trust fund.” It depends solely on the expectation that future Congresses will honor promises made by earlier Congresses—what supporters call “a compact between the generations” and opponents call a Ponzi scheme.

    Context. From an article on proposals to replace part of Social Security with individual investment accounts, written while the federal budget was in surplus. The quotation inside the passage is from the Social Security Administration.

    The Biggest Ponzi Scheme on Earth
    Column, 1999, The New York Times, January 11, 1999, as “Social Security Chimeras”; reprinted with minor editorial changes in Hoover Digest 1999 No. 2
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  2. Let me take the example which today is the greatest sacred cow of them all, Social Security. Was there an overwhelming demand for Social Security in the 1930s when the law was adopted? Far from it. There was no public demand for it. It had to be sold. How was it sold? By the slickest devices of Madison Avenue, by imaginative packaging and deceptive labeling. Social Security was sold as an insurance scheme. It is not an insurance scheme. There is very little relationship to the amount of money any one individual pays and the amount of money he is entitled to receive. Social Security is a combination of a bad tax system with a bad way of distributing welfare.

    Context. From his 1977 lecture “Myths That Conceal Reality.” Just before, he says that the measures that expanded government were adopted without any underlying public demand; the demand had to be created.

    Milton Friedman Speaks - Myths That Conceal Reality
    Speech, 1977, at 26:02
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  3. Because if the government spends more or less, somebody else has less or more to spend. There’s an offsetting element unless the government spending is financed by printing money. What really matters is what happens to monetary policy. Monetary policy goes one way and fiscal policy goes the other way. If you look at all such examples, monetary policy has always dominated—not fiscal policy. If you reduce taxes then people have more to spend, but on the other hand, government has less to spend. Why is there any net increase in total spending?

    Context. Asked whether cutting taxes would stimulate a slowing economy, he said it would not, pointing to Japan, which in ten years of rolling recession had had four or five major fiscal stimulus programs, increases in government spending and reductions in taxes, all of them, he said, an utter failure. Asked why, he answered.

    Friedman on the Surplus
    Interview, 2001, Interview by Peter Robinson for Uncommon Knowledge, January 17, 2001; adapted in Hoover Digest 2001 No. 2
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