Social Security: Universal or selective? (1971) – with Milton Friedman and Wilbur Cohen | ARCHIVES



Narrator: Washington debates for the '70s. A series of debates designed to bring together
for an open exchange of views and opinions, outstanding authorities on vital issues facing
the world of the '70s. The topic, "Social Security: Universal or
selective." Now, here is Peter Hackett. Peter Hackes: In our society, people are living longer
than ever before. Retirement comes earlier than ever before. Hence, our senior citizens are finding many
more years to be lived without the financial security of a job, thus an issue of prime
importance to millions of Americans is social security. Despite the fact that social security is a
fact of American life and has been for many years since its inception in the depression
of the 1930s, the system has been criticized for some shortcomings. Some attacked the very concept of social security
and insist that it be done away with. Welcome to another in a series of rational
debate seminars presented by the American Enterprise Institute for Public Policy Research. A nonprofit, nonpartisan research and educational
organization. Our two debaters are Wilbur Cohen the former
Secretary of Health Education and Welfare in the Johnson administration, and the noted
economist, Dr. Milton Friedman. We also have with us a panel of experts in
the field, people engaged in making public policy through teaching, influencing, and
writing about economic matters. They will comment upon and question our debaters. Now, to present our discussion, Peter Lisagor,
a longtime Washington newsman who is Washington bureau chief for, "The Chicago Daily News,"
Mr. Lisagor. Peter Lisagor: Ladies and gentlemen, welcome
to another in a series of rational debate seminars. One would have thought that social security
was a program universally accepted by most Americans and quite beyond the reach of even
a rational debate. Not so of course, and especially not so when
you have two of the liveliest minds in the country debating its virtues and its drawbacks. This is the sixth rational debate seminar
of the 1970-71 academic year. Our subject is, "Social security: Universal
or selective." And our two participants are in the order
in which they will debate on my right, Wilbur J. Cohen. He's a former Secretary of Health Education
and Welfare. He's now Dean of the School of Education and
professor of education at the University of Michigan. Mr. Cohen became involved in social security
affairs before the inception of the program. In 1934, he was research assistant to the
executive director of President Roosevelt's Cabinet Committee on Economic Security, the
committee that drafted the original Social Security Act. Mr. Cohen is author of several books and numerous
articles in the field of social security, health, welfare, and education. And on my left, and don't take this literally,
Milton Friedman, one of the most noted economists in the world today. He is the leader of the so-called Chicago
School of Economics known to some as the Cook County School of Economics. He's been professor of economics at the University
of Chicago since 1948 and is currently the Paul Snowden Russell Distinguished Service
professor of economics there. He is a regular columnist for, "Newsweek Magazine,"
and a prolific writer having authored several books on economics. Ladies and gentlemen, first, Mr. Cohen. Wilbur Cohen: I am indeed gratified that we have
this opportunity for a periodic reappraisal of the social security system. There was such a reappraisal in the 1936 campaign
when President Landon attacked the social security program as being a cruel hoax. The re-election of President Roosevelt established
for all time that the people of this country believed in its principles, and it was extended. In 1953, the program was again reappraised
by a Republican administration under President Eisenhower, and in 1954, it was agreed that
the program was sound and desirable in the American system and it was again extended. In 1969, it was reappraised again by President
Nixon and his cabinet officers, and it was found to be a kind of programs that should
be extended. So I believe this fourth reappraisal will
be good and the net result will be another further extension and improvement of social
security, which Congress will adopt this year. Social security is a program which works. Twenty-six million people draw benefits each
month, 80 million people contribute to it, and it is a program which seems to have the
overwhelming support of the 26 million people who draw the benefits, and as far as taxes
are concerned as much enthusiasm for the payment of those taxes as anyone can find. It is of course the most important guaranteed
income program in the United States. It provides as far as possible in this world
of doubt and limitation, a guaranteed income to the people who are under it by providing
for a mechanism of insurance, a trust fund, and kinds of taxes which enable the body politic
to believe, sincerely, and the political people to believe that they have done as best they
can in this rather fallible world of ours, to provide a guarantee to the beneficiaries
who will receive it. In addition, it is the biggest anti-poverty
program in the United States. Among the 26 million beneficiaries, there
are 11 million whom if there were no social security would now be in the poverty program. It is a program which of course by demonstration
appeals to all of the various income and other groups in our society. It appeals to the low income groups because
it does provide income to low-income people, and as I have indicated, many millions are
kept out of poverty by its provisions. Its particular value is that it appeals to
the middle-income group, which is very largely responsible for most of the things that happen
in the United States, in the political field, while at the same time, receiving some support,
even enthusiastic support from high-income people. Very few programs in the United States can
say just exactly what I have said, that it enjoys the support of all income classes very
substantially. But in addition, it enjoys the support of
blacks and other minority groups in our country who believe that the payment of benefits as
a matter of statutory right without a means test is one of the best protections to them
against discrimination and variation in benefits, which comes from attempting to make the payments
determined by either states, or localities, or income, or some other item that does not
give them the degree of security or assurance which the present program does. If success in my opinion is because it has
in it the principles that reinforce the capitalistic free enterprise system since it emphasizes
thrift and saving, since it provides for individual responsibility in making the individual employee
and his employer contribute for it. And because its variable benefits in relation
to wages reinforces that element in our free enterprise system, which varies wages and
varies rewards in relation to your contribution to the system as expressed by the wage and
salary system. Therefore, those who propose to change it
must in my opinion demonstrate that they have a better system that will reinforce our free
enterprise system, that will win the support of those who pay the taxes, and that they
will win the support of those who believe that this system does give them a measure
of security. The basic element in the social security system
of course is that it does not have a means test, a resource test, or a income related
test of any kind that is related to the point where you have to show your income or your
resources. That is of course what is most meaningful
to the poor, and the middle class, and the minority groups, and any substitution for
the present system which would provide an income related test in its stead will of course
meet serious objections from the American public and therefore would have to be carefully
substantiated before a change could be made. I would add only this. The social security system is not simply an
economic institution. Man does not live by bread alone, nor are
all of the elements of an institution solely determined by economists. In the social security system is a mixture,
a rare mixture of political sagacity, of economics, of compassion, of understanding, of institutionalizing
in our political system certain rights and responsibilities, of income provided to people,
at the same time, tying closely a relationship to paying the cost. That is a very, very important element in
the system and one which cannot simply be analyzed strictly on the basis of income and
outgo by economists. Political figures, sociologists, those interested
in other aspects of our society have a role to play. I am very happy that the Chicago School of
Millicent Douglas before 1932 played a big role in creating this system. And along with those from Wisconsin and Princeton,
they provided the basic fabric of what is one of the most remarkable and successful
programs that we have had in the United States. Of course can be improved and it should be
improved. In addition, of course we must find a better
way to be able to deal with the problems of poverty and the problems of income distribution
in our country. I have long publicly stated that I favor a
welfare system, a welfare reform, an income payment program which is administered solely
by the federal government, which is administered and financed by the federal government out
of general revenues. But that system should not be a substitute
for social security. It should be a transitional system as best
we can make it, which would enable us along with other measures in the field of education,
in the fields of jobs, in the fields of public service employment, and many other types of
programs to reduce the extent of poverty but to make a social security system a benefit
payable as a matter of statutory right, the basic system, and to have those improvements
over time made which will enable us both to eliminate poverty, but at the same time to
have a program as social security does, which reinforces thrift, which reinforces initiative,
which reinforces the program of rewards in relation to productivity. And I believe that it provides a sound basis
for the improvements for the future. Peter Lisagor: Thank You Mr. Cohen. Astonishingly, Mr. Cohen stayed within his
allotted time. I wasn't aware that there was a Chicago School
before Milton Friedman but now we know there was. So I give you, Milton Friedman. Milton Friedman: If I seem a bit confused as
I talk to you, it's because I'm trying to figure out where I am. Literally, I ended up to the left of Mr. Lisagor,
which is no mean feat and to the right of Alfred Landon which is no mean feat. Wilbur Cohen tells me I don't even belong
in Cook County. So, I will try to figure out where I am but
in the meantime, let me turn to the subject and my subject is really two separate programs. The social security program of which Wilbur
Cohen spoke and also the welfare program of which he spoke. These two programs were both introduced in
the Great Depression. Supposedly, the first as a permanent program
to enable people to have benefits as a matter of right, and the second, the public assistance
program is a temporary program for people in distress. Like most government programs of course, both
are still with us and larger than they ever were. I want to talk first a little bit about social
security, then about welfare, and then try to put the two together. The great problem as I said in discussing
social security, and for simplicity, I am restricting my comments to old-age and survivors
insurance. The great problem in discussing that program
is to separate rhetoric from reality. Mr. Cohen gave you the rhetoric, so I will
try to give you the reality. The rhetoric is that the social security program
is an insurance program in which individuals have benefits as a matter of right assured
to them by the accumulation of a trust fund. This is pure rhetoric. The reality is that any relationship between
social security and private insurance in which individual benefits, individual payments by
individual benefits is purely coincidental. The benefits that an individual may receive
may vary widely even though he pays the same amount of taxes as somebody else. The taxes people pay very enormously widely
even though they receive the same benefits. In fact, the benefits which are related to
earnings vary over a range of three or four to one. The taxes that people may pay to acquire those
vary over a range of something like 80 to 1. Millions of people who pay taxes will never
receive any benefits because they haven't…attributable to those taxes because they haven't paid for
long enough or because they receive benefits as spouse instead of in their own right. The reality is that any assurance people have
of benefits does not derive from a trust fund. There is a trust fund. It's roughly of a little over 30…between
$30 billion and $35 billion. Some 10 years ago, Mr. Myers who was here
from the social security board estimated that it would take a $300 billion trust fund to
meet the obligations then outstanding. Today, that figure would be vastly higher. The truth is that if you strip the rhetoric
from the reality, the truth is…and what you have is a system under which there's a
tax on the one hand and there are benefits on the other. The taxes that you and I pay are being used
to pay benefits to the people who today are receiving their pensions. That may be a good thing, it may be a bad
thing, but it is a very different thing from individual benefits actually related to individual
payments. What assurance do people have that they will
get their benefits in the future? The reality is that the only assurance they
have is confidence that future taxpayers will validate the promises that present taxpayers
are making. You and I are promising ourselves benefits. The assurance that they will be paid is that
future taxpayers, our children, will in their turn impose taxes on themselves sufficient
to pay those benefits. That may be a sufficient assurance but it's
a very different thing from a trust fund. I think the right way to look at social security
is as a tax on the one hand and a benefit structure on the other. And there the thing that has impressed me
over and over again is that I know hardly anybody who will defend the tax system by
itself, who will defend a regressive tax, a payroll tax on income up to a maximum. I know hardly anybody who will defend the
benefit system by itself, who will defend the benefit system in which some people in
great need get nothing, other people who have high incomes get the maximum amount that the
system offers. And there are many more detailed versions. And yet when you put the two together, the
two together have become a sacred cow that Mr. Wilbur Cohen quite properly described
as widely approved and widely backed. I think this is one of the most extraordinary
cases of imaginative back packaging that the commercial world has ever seen. Now, let me turn for a moment to the welfare
system. Oh, I want to go back and say one more thing. If you look at the combined tax and benefit
system, I believe there is little doubt that on balance, it provides benefits to people
in higher income classes than on the average the people who pay the taxes. That's not true in every individual case but
if you examine the system as I've tried to in my fuller paper, as it would operate on
a full basis, I believe there is a strong presumption that the old-age and survivors
insurance system transfers income from low-income groups to middle and upper income groups. Now, I want to turn to welfare. The welfare system I can treat more readily
because we all agree it's a mess. It's a system which is highly inequitable,
it's a system which has reduced incentives to work, it is a system which has demeaned
many people by separating people into two classes, welfare recipients and others, and
inducing welfare recipients to remain in that category on a permanent basis. I think that system should be reformed, and
the direction in which it should be reformed is the direction which President Nixon has
proposed in the Family Assistance Plan, a negative income tax, although I don't agree
with the particular structure of that plan, it doesn't provide enough incentive. Now, what shall we do about these two programs
taken together? In my view, we should not have two separate
programs. In my view, the government has no business
doing for people what people can do for themselves. Individuals separately are perfectly capable
of providing for their own retirement. What I would like my government to do, what
I would like to do as a taxpayer in my government is to contribute to a program which assures
people in dire distress of a minimum assistance to keep them from destitution regardless of
why they are destitute. Whether they are old, whether they are unemployed,
whether they are disabled, whatever may be the reason why they are destitute, I would
like to us to have a single program which would provide assistance and a minimum scale
to enable them to avoid the destitution. And therefore, I believe that the right road
for the future is to underline social security, meet every promise we have so far made. We have made promises and commitments and
we should fulfill every one. But underline social security on the one hand,
and on the other, reform our welfare program in such a way that it will provide assistance
to all who need it regardless of the reason for their need. The details of how to do that I have tried
to spell out a little in the larger paper that has been available to you. I cannot go into it here except to say that
on the social security side, the idea would be to provide people with firm vested commitments
for whatever benefits they have so far earned under the social security program, and then
eliminate the payroll tax and eliminate the further accumulation of rights. On the welfare side, the idea would be to
have a full-fledged negative income tax with a marginal tax rate that would preserve a
very large measure of incentive. I would hope a rate of not more than 50%. Now, let me end by reading the final three
paragraphs of the paper I submitted because I believe it puts in a nutshell what I want
to say. Social security programs involve annual expenditures
of over $43 billion. These programs appear on balance to transfer
income from relatively low income classes to middle and upper income classes. They are flourishing, are widely regarded
as highly successful, and seem destined to expand. Welfare programs involve annual expenditures
of $15 billion. These programs appear to on balance to transfer
income from middle and upper income classes to lower income classes. They are in a state of crisis, are widely
regarded as intolerable, and seem destined to be transformed. Is this another example of what George Stigler
has called Directors law in operation. I read you Stigler's formulation of that law. "Public expenditures are made for the primary
benefit of the middle class and financed with taxes that are borne in considerable part
by the poor and the rich." Thank you. Mr. Lisagor: Thank You Professor Friedman. Now, Mr. Cohen will have five minutes for
rebuttal. Wilbur Cohen: Professor Friedman makes a good
point that when you look at the social security system alone as a tax or as a benefit, it
probably would not be justified as separately. But that does not make the argument sound
in saying that when you look at them together, they are not sound. My analogy would be a man alone can be looked
at alone, a woman alone can be looked at alone, but when you put them together, something
happens. That's what's happened in social security. Putting them together has been the art of
doing something and it's more than rhetoric. Professor Friedman also in a sense of tax,
the concept of insurance, and that is mainly because he doesn't know what the concept of
insurance is. He defines it in a Friedman definition but
not the right definition. Insurance does not mean that you have to have
an actuarial relationship between the individual contributions and the individual benefits. If so, all group insurance says in the United
States would not be insurance under his test. I won't argue about his definition, if he
wants to have his definition, let him have it. It's not my definition, it's not the definition
that the Congress of the United States has given. They've called it insurance. The Supreme Court of the United States has
called it insurance, and my article in the Encyclopedia Britannica calls it insurance. Take your pick. Professor Friedman calls a lot of the things
that he doesn't like about social security, rhetoric, and that's exactly my point. My point is the economists of this country
do not determine all of the choices, and options, and attitudes, and things that go on in this
nation. People do live by rhetoric. You couldn't understand what goes on in the
United States if you didn't understand something about rhetoric. And think of all the people in this audience
that we put out of a job if we didn't have such a thing as rhetoric. I believe in rhetoric because it makes a lot
of things palatable that might be unpalatable to economists. Finally, he attacks the idea, to some extent
rightfully, that the present system is a system primarily of redistribution of income to middle-income
people. I think he's actually right and that is the
political sagacity in the social security system. Since most of the people in the United States
are in the middle-income middle class system, it is a program which appeals to them. Now, to the extent that he makes a point that
there is a transfer of income from low income people to middle income that could easily
be rectified by certain changes in the financing. You don't have to do away with the social
security system to rectify that. But the reason why, oh we oh, and all other
types of programs that don't appeal to the middle class, don't get appropriations, don't
get support from the taxpayers, is simply because they do not appeal to the middle class,
middle-income person. True, if you're an economist you may exclude
all matters of politics, but I would then say that's not reality, Mr. Milton. And so, I believe that the essence of social
security in appealing to middle income is desirable and those things that are criticized
in social security could easily be remedied by certain changes. Now, my major objection to the negative income
tax as a complete substitute for social security is that I am convinced in the present situation
in the United States, a program that only deals with the poor will end up being a poor
program, and there is every evidence on my side that that is true. Programs only for the poor, since 1601 under
the Elizabethan Poor Law have been lousy, no-good, poor programs. And having a program that is only for the
poor, not for the middle-income, not for the upper income, is a program that will not in
the long time be financed and supported by the American public. And for that reason I think one must try to
find a way to join this program. I would therefore argue that a continuation
of the social security system with some support underneath of a guaranteed income, negative
income tax, welfare reform, national welfare system is more in keeping with the American
system of free enterprise and with our political system than dumping social security and substituting
for it therefore a poor program only for poor people, which in the end would not give security
to poor people either. Peter Lisagor: Thank You Mr. Cohen, and now
for a five-minute rebuttal by Professor Friedman. Milton Friedman: As many of you probably know,
there are quite a number of state legislators that at one time or another have passed a
law saying that the value of pi should be three. According to Mr. Cohen's analysis of the meaning
of insurance, that means that pi is now three. I recognize of course that insurance does
not mean that individual payments are equal to individual benefits but rather that individual
payments have an actuarial equivalent in the benefits that are associated with them. And there is no, I assure you, and in that
interpretation of insurance which is the interpretation that is widely accepted in you, there is very,
very little connection between social security as it is now set up in any kind of an insurance
program you can dream of. Now, of course combining the taxes and the
benefits does serve a purpose. It serves a political purpose. It serves a political purpose of getting people
to accept something under false pretenses. It serves a purpose of selling to people a
program which they would not buy if they knew what they were buying. This is a political role of linking them together
and this is what I meant when I said, it was a triumph of imaginative packaging. But as an economic matter, as a political
matter, other than getting it adopted, the combining of the two halves is not, I'm sorry
to say, anything like the ineffable chemistry of combining man and woman. I am really a little puzzled by the argument
Mr. Cohen makes here and in his paper that hinges around the phrase a program for the
poor will be a for poor program that hinges around the statement that he recognizes that
the social security program provides disproportionate benefits to middle classes but that's the
price of getting it enacted. And what puzzles me is this. Are we really helping poor people by saying
to them, "Here is a program under which we will take $2 from you and give you $1 back
and we can get that program passed, but we can't get a program passed which will take
$1 from you and give you a $1 back." Well, if that's the case, it seems to me that
if I were one of those poor people, if I were one of the people who Mr. Cohen is talking
to and saying, "Don't worry, we'll take care of you. We promise that for every $2 we take from
you, you'll get one back." I would repeat Thoreau's wonderful comment
that when I hear that people are coming to do me good, I run as fast as I can to get
away from them. Now, I think fundamentally what is at bottom
of the difference between Mr. Cohen and me, and here I agree with him is not economics,
is not economic analysis, but it's basic philosophy. I believe there is a fundamental difference
between two philosophies. One philosophy is that of a society in which
the ultimate entity is the individual, in which the society rests upon the idea that
people are responsible for themselves and that people are responsible for those close
to them. That if I have a moral responsibility, it
is an individual responsibility, then I cannot discharge by paying taxes levied on me by
some Congress. I have to discharge it personally. That's one view, that's my view. I believe that Mr. Cohen's view, one which
unfortunately is very widespread and very widely held is different. It treats the nation as not a collection of
individuals and of the groups which individuals separately value but as an organismic unit. I read from his paper. Says Mr. Cohen, "I speak for the view that
the nation should be generous toward the elderly." I would argue that the nation can't be generous
to anything. Only people can be generous. Generosity is a human individual trait, not
a collective trait. There's no generosity involved in my imposing
taxes on you to help him, that's not generosity. But nonetheless, underlying the social security
view, and it is a view that is very widespread. Is that society is an organism, that there
is a group within the society who knows what's good for other people better than they do
themselves, and that that elite has an obligation, a duty, and a responsibility to induce the
public at large to pass the laws that will be good for them. That in particular, it has the obligation
to package this program in a way in which they will adopt it even if they would not
adopt each part separately. Now, obviously that's not the way Mr. Cohen
would describe his philosophy but he is an eloquent man and describes it very well for
himself. But it does seem to me that fundamentally
at bottom, you do have these different views, and that he is right in saying that there
is a far more fundamental issue at stake than the issue, the technical issues involved in
the detail of the program. That fundamental issue is as we look toward
the future, do we want to see our society develop in a way in which individuals separately
will have greater responsibilities or do we want to see it develop in a way in which the
collective entity is more dominant and more omnipresent? Speaking for myself, I would say that our
growing wealth, our growing income makes it all the more possible for us to let individuals
separately run their own lives. And I would like to see us develop in a way
which gives greater freedom to each one of us separately and which reduces the role of
collective entity. Thank you. Peter: They are cogent arguments as we've
seen on both sides of this issue of social security. Dean Cohen feels the social security system
is a sound one, that its shortcomings can be cured by changing the present system rather
than by adopting a new one. Dr. Friedman to make use of his own words
wants to reform welfare and unwind social security. We go now to our panel of experts for their
questions and for answers from our speakers. Mr Lisagor: Would you kindly identify yourselves
and direct your questions at one or both of the speakers. Who has the first question, yes? Dorothy: I'm Dorothy McClellan, Senate Committee
on aging. I have a question for Mr. Friedman. With his last estimate from Bob Myers of $300
billion deferred cost. What happens to the economy if the nation's
workers are faced with the collapse of a system in which they believe? How do they get their $300 billion out right
now? What happens in the future to provide any
incentive for people to save through private pensions or through individual savings when
whatever income they managed to put by is going to make them ineligible for a needs
test payment. Milton Friedman: Well, you've asked a number
of questions together. Let me take them one at a time. First, with respect to the $300 billion, we
have that in which probably is $500 billion or something like that now, we have that obligation
now. The only point is that it is not funded, it
is not written on paper, no economic fact has changed by funding it. It's got to be paid now somehow or other in
the future. And what I'm proposing here is that we recognize
that we have that obligation, and we write it down on pieces of paper, that we fund it
in the form of an explicit government debt instead of an implicit one, and in the details
which I have in the paper. I have funding it in a way in which workers
would get it ultimately at the same time as they now would but I want to enable us to
discontinue further regressive taxation of the workers. So, there will be no collapse of the system. That's just again a figment of the imagination,
the fact is you now have that debt, you now have that obligation. If that's going to collapse the system, the
system should collapse now. Second, the question of incentive. The facts are almost the reverse of what you're
speaking of. Our present social security tax is a large
disincentive. Anybody who goes to work, over 10% of his
wage cost at the low level up to $7800 now, it will be higher later on. Over 10% of his wage cost to his employer
is now taken out and sent to social security and he only gets less than 90% of it. Therefore, he does not have sufficient incentive
now. Indeed, one of the great problems of providing
sufficient incentive for people to get off welfare is that if they get off welfare and
take a job, well, then over and above, any reduction in their welfare benefits they now
have to start paying social security taxes, they have to pay 10.8% of their wage cost
in taxes, and that raises a marginal rate. In fact, I was astounded when I went through
these numbers. I had always thought the disincentive to work
was associated with a high tax rate of the personal income tax. I am now persuaded that the social security
tax is a greater disincentive to work, that are the high rates of the personal income
tax because it hits people lower down, it hits people who have the alternative of relief,
and it hits them hard. The social security tax paid on behalf of
people today is for most people decidedly higher than their personal income tax. So in my belief, in my opinion, eliminating
the payroll tax would add to incentives of people to work, it would give us a larger
output, it would make it more feasible for people to put their own funds aside, to provide
for their later benefits, for their own private pensions. Wilbur Cohen: First, I don't think there's any
really empirical evidence that Friedman can support the show that the payroll tax has
been a disincentive. Number two, if social security were abolished
and left to private enterprise, then the unions through collective bargaining would see that
the same tax would be put on through collective bargaining. So the net economic effect that he's suggesting
is exactly the same. If they didn't put it on through collective
bargaining, it would then have to be paid out of general revenues in which the only
way you get the money is raising the marginal rates back from 70% to 90% as they were before. Now, what I'd like to know from Professor
Friedman, which of those two does he recommend? The union's bargaining with the employers
to put it on through payroll taxes or raising the marginal rates back to 90%? Milton Friedman: Neither. Wilbur Cohen: How are you gonna get the money
then? Milton Friedman: Well, the money for which? For paying the debt we now have in the United… Wilbur Cohen: No, no, no. For giving people the security which they
would get through the private enterprises system. Milton Friedman: In the first place, there is
an enormous difference between individuals separately paying over part of their wage
to buy a pension which they separately desire. That is not a disincentive. If I spent some of my income to buy a pension
out of my own free will, that's part of my payment, that is not a disincentive. The disincentive arises because the social
security tax which is deducted from my salary has a very minor relation to any benefit which
I will subsequently get. Wilbur Cohen: But you're living in an unreal
world Professor Friedman. You know that if the social security were
repealed, it wouldn't be left to individual John Jones, the unions would bargain with
the employers to put that cost right back entirely on the employer, which would have
exactly the same economic effect as it has now. You'd have larger reserves than you had now. So what would you have gained economically? You'd have the same disincentive. Milton Friedman: What you're saying is wrong. It is wrong for several reasons. It is wrong first because only 25% of workers
are today unionized and most workers are not. It is wrong in the second place because the
unions would only bargain for such pension benefits of this kind as the workers would
prefer, their union members would prefer, the union leaders aren't after all the employees,
the agents of their own members, they would only bargain for such benefits as their own
members would prefer to have in the form of pensions rather than in the form of cash. In the third place, of course both under social
security and under union arrangements, there is no important difference between whether
in the first instance attack, the sum is paid by the employer or the employee. Wilbur Cohen: I agree! Therefore the unions and others would put the whole cost on the employer. Milton Friedman: No, no, I have to stop because
this is a historic moment. Mr. Cohen and every single thing I have ever
seen that he and other people have written has denied the proposition he just agreed
to. He agreed now that the…. Wilbur Cohen: I have never denied it, I have
never denied it. You've never seen or heard where I've denied
it. I justify it not on economics, I support it
on the basis of aesthetic logic, which you don't recognize. Milton Friedman: Excuse me, I have seen you write,
I have seen things written under your name maybe you didn't write them but your name
was signed on it. I have seen certain things written under your
name in which you compared the benefits received by an individual to the employee tax without
making mention of the employer tax and implying that that employer tax could be neglected
in relating individual payments to individual benefit. Wilbur Cohen: What you have seen but not correctly
interpreted is the fact that you use the employee contribution as a measure of equity in the
system but there is also such a thing as social adequacy. If you read Reinhard Hohaus, the vice-president
Metropolitan's famous essay of 1937 on equity and social adequacy in social insurance, you'll
see that both elements are given some weight. I completely support the idea that in social
insurance, you have two attributes. An equity concept and a social concept. That is the ark that's made social security
a acceptable system. Milton Friedman: We are talking across purposes,
I want to ask you a simpler question, a very simple question. Do you agree that the tax on the employer,
that the division of the total tax between the tax on the employer and the tax on the
employee has little or no effect on who pays it? Wilbur Cohen: That is correct, so what? So what do you draw from that? Milton Friedman: If that is correct… I draw. Man: Excuse me I think I'll just go. Milton Friedman: Well, as I say, I regard that
as a historic moment because I have never seen in any social security document or in
any document written by you that admission. And that admission means that many of the
statements made by you and by social security about the relation of benefits to amounts
paid or to put it, to not to put a fine word on it, are pure hogwash. Mr. Cohen: Well, you know, there's an old
Yiddish term called chutzpah. Milton Friedman: And you and I both have our
share. Mr. Cohen: Professor Friedman demonstrates
chutzpah better than anyone else I know. When he disagrees with anything that somebody
has said he says you're not meeting my definition. Well, the point is simply that the social
security system does meet these tests of insurance, meets a test of equity, meets a test of social
adequacy, and the fact that he doesn't agree with it, you know, he's not Congress, he's
not the American people, he's only an economist. Milton Friedman: Thank God for small favors. Peter Lisagor: Should we try another question? Theodore: I'm Theodore Shorkit
of North American Newspaper Alliance. My question is directed to Professor Friedman. In your paper and in your remarks, you've
stated that public assistance was intended as a temporary program for persons in distress
to be largely phased out as employment improved and as social security matured. And then you say, there's no sign that social
security is displaced assistance, both were at all-time highs, etc. Now, aren't you mixing apples and oranges
here Professor Friedman? Isn't it a fact that the portion of the public
assistance program which is directed to the hazards at which the social security program
is directed, that is old-age and orphan, premature death of the breadwinners, isn't it a fact
that those portions of the public assistance roles have declined markedly, and to that
extent, the social security system has accomplished what it set out to do? The social security system was not created
and nor has it ever been in business to take care of family break up due to divorce and
desertion. Those are the factors which have made the
public assistance roles leap to an all-time high. Milton Friedman: There is no doubt that some
of the people who are receiving benefits under social security are people who in the absence
of social security, might be on the assistance roles, that's quite right. Now, the question…and I wouldn't want to
argue for a moment that there isn't some substitution or competition between the two. What I meant to say here is that in this initial
version, at large when I was trying to find a phrase in Mr. Cohen's paper which said essentially
the same thing about the initial intent. In the initial version, the idea was that
the… Here we are. Said Mr. Cohen, bottom of page 10, "The 1935
decision was to accept plan two with the hope that the welfare portion would ultimately
wither away." Now, the initial idea was that old age or
unemployment, the identifiable things were the major source of need for public assistance,
and that if those were adequately taken care of, the need for public assistance would largely
wither away and disappear. And all I was trying to say here is that that
has not been achieved, that on the contrary, public assistance has grown. It might be that it would have grown still
more rapidly if there had been no social security system but that's by no means obvious. The reason it's by no means obvious is because
while social security has…while there are some people now receiving benefits under social
security who would be under public assistance, there may well be some people under public
assistance who would not have been there if there had been no social security program
because you must look at the taxes that were extracted from people as well as the benefits
they received. Now, up to now the persons who have retired
have received much more than they ever paid separately as taxes. That's the difference between the young and
the old. And so undoubtedly today, more people are
displaced by social security than are added to the public assistance role by social security. But it's not obvious that's going to continue
to be the case. Mr. Lisagor: You still have your question? Bill: I've got a question for Mr. Cohen. Bill Carlson, House Committee on Government
Operations. You place considerable emphasis on the public
acceptance of a social security system, do you see this continuing after the first enthusiastic
recipients, those who I think probably got a better bargain out of social security than
future recipients will get? Do you see this same public acceptance continuing? Mr. Cohen: I believe that as the payroll taxes
go up, there will be a greater degree of resistance against future increases beyond some limit
that people think is acceptable, and therefore I believe that you will have to consider several
alternatives which I have written about in my public papers. And some of them may be as follows. Increasing the payroll tax on the employers
substantially above the present limit, providing for a governmental subsidy, perhaps reducing
or rebating the tax on low-income people, and perhaps having some type of guaranteed
minimum or negative income tax, and building a double-decker system in which you'd give
X to everybody out of general revenue somewhat like Mr. Friedman suggests, plus a variable
benefit related to the contributions you make. There are a number of such possibilities,
and in my paper I've indicated that all of those are possible as changes in the social
security system keeping the present general purpose and general direction. Milton Friedman: Now, I just want to ask one
question to Mr. Cohen in this connection. He has been emphasizing the extent to which
you can project the past into the future. Does he also project that just as in the past
20 years, the tax per person has gone up twice as fast as the benefit per person that that
will also continue because I think that's very highly relevant to the question that
was just asked? We've had tax per covered person has risen
seven and a half fold from 50 to 70, and the benefit paid has risen something like threefold. Do you think that that discrepancy will continue? Mr. Cohen: Well, I don't know. Of course during the same time, marginal tax
rates for people in higher income groups have been reduced from 90% to 70%. Maybe what we have to do is increase that
70% to 80 or 90. Under your proposals for more general revenues,
you are pushing for higher marginal rates on higher income people, that's what your
proposals are leading to. Now, that's not what you favor but that's
what you're gonna get. Milton Friedman: I'm sorry… It's not what I favor and it's not I hope
what I get and let me emphasize that what you just stated about the income tax is not
correct because you are looking at nominal rates and not at real rates. Inflation has raised the burden of the income
tax so that despite decreases in rates, the average effective rate paid on the personal
income tax is higher today than at any time in our history including the peak date in
World War Two. Mr. Lisagor: Question over there. Man: I'd like to ask Mr. Cohen, please sir. How do you ascertain the assertion, the fact,
that private initiative and private pension funds are greater because of, or in spite
of social security? You said that they are growing, how do you
know they wouldn't have grown twice as fast if you hadn't had social security? Wilbur Cohen: They would have, I would agree
they would have had to grow twice as fast if there weren't social security because the
social need would have been there. I do not deny that. Man: That has been a deterrent to the growth
of private funds. Wilbur Cohen: Well, certainly it's been a deterrent,
thank God because if you would have all of this money in private pension plans at the
present time with no vesting and with the sort of things you have in present private
plans, and Studebaker companies going bankrupt leaving people without pension rights, you'd
have disaster in the United States. So I believe that the blend of social security
which is a minimum guarantee plus the selective private pension for companies, and unions,
and comported is the best of both possible worlds. Mr. Lisagor: Gentlemen we have time for one
brief question and hopefully a brief answer. The final. Wilbur Cohen: Hope springs eternal. Professor Friedman you have been preaching
the gospel of consumer sovereignty and I am fully in agreement with you but I'm just wondering
why is this contrary to the gospel of capitalism and freedom, that this consumer sovereignty,
if individual let's say goes out and buys monetary history of the United States, or
whatever way he wants to spend his money. But it is not consumer sovereignty when there
are a number of individuals band together and decide that they want to have social security
or some kind of benefits paid by the government, and for which they want to contribute or for
which they are going to get at some future date. But do you have some special knowledge that
this is contrary to the will of the electorate of the United States? Milton Friedman: Well, I think you've asked not
a simple question but an extremely complicated question that goes to basic political philosophy. In the first place, I have not been in any
way saying that we should violate the laws of the land or that the law should be decided
in another way. I've been trying to persuade the people if
they ought to vote differently. That's a trying to serve the same function
with respect to consumer sovereignty as you define it as advertising serves with respect
to consumer sovereignty in the private market. But much more fundamentally, I believe there
is a philosophical difference between consumer sovereignty in which 100% of the people decide
to join in a program and a situation in which 51% of the people impose taxes on the other
49% of the people. I don't believe they really come under the
same rubric, and I think you do not agree…you do not believe so either. If I said to you, under your definition of
consumer sovereignty, if 51% of the people vote to shoot the other 49% of the people,
is that appropriate consumer sovereignty? You would say no, of course not. Man: I would say it's not an appropriate similarity. Milton Friedman: Well, but exactly the same way
it is not an appropriate similarity to individual consumer sovereignty to say that 51% of the
people vote to impose taxes on 100% of the people in order to pay benefits, let us say
to 100% of the people. I favor a majority rule as an expedient, as
a way in which there are certain decisions have to be made jointly and this is the least
bad way of doing it. But I do not regard it as a principle. Whereas I do regard individual responsibility
for himself that my using my resources to achieve my objectives so long as I don't interfere
with anybody else doing the same. I regard that as a principle. There are wholly different kinds of majority
rule as an expedient. Peter Lisagor: Mr. Cohen, a final comment. Wilbur Cohen: Individual responsibility may be
defined as a responsibility of people to have the freedom to starve if they wish. I believe that there's a higher and more noble
principle and that is a social responsibility of all society, when as Mr. Friedman says
the commandments say, "Honor thy father and mother," it did not say honor thy father and
thy mother as economists have predetermined. It said, "Honor thy father and thy mother
in all of the ways that you may think of," including social responsibility and that is
what social security is. Mr Lisagor: Gentlemen, on that note I want
to thank both of you. I want to thank both of you who I think have
shown us what debate means and also what chutzpah means. And I want to thank you ladies and gentlemen
for your active participation. Peter Hackes: Quite obviously, this will not bring an end to the discussion of the pros and cons of social security. Our focus of course has been to bring forth
some pertinent views in this field. The American Enterprise Institute has been
pleased to present arguments on both sides. This is Peter Hackett in Washington. Narrator: Washington debates for the '70s
is created and supplied to this station as a public service by the American Enterprise
Institute, Washington, D.C. Produced in the nation's capital by Broadcast
News Washington.

10 thoughts on “Social Security: Universal or selective? (1971) – with Milton Friedman and Wilbur Cohen | ARCHIVES”

  1. Unfortunately we have a nation that has gone the way of Wilbur Cohen instead of Milton Friedman. Wish more people would understand and learn Milton Friedman.

  2. who guarantees what ? and govt guarantee is a myth. it can't give anything without taking from others !

  3. Wow, a debate that's focused on the topic without any character or personal attack, we miss that in our days and you can look at this debate and compare it to Jordan Peterson and Dyson debate, it will show you that we are going downhill.

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