Friedman

SFGate reports San Francisco seems an unlikely home for the man who in 1962 first proposed the privatization of Social Security. Asked why he dwells in liberalism's den, Milton Friedman, 92, the Nobel laureate economist and father of modern conservatism, didn't skip a beat. "Not much competition here," he quipped... Friedman is considered perhaps the most influential economist since John Maynard Keynes. Keynes, the British economist whose ideas propelled the New Deal, was to Republicans what Friedman, son of poor Jewish Brooklyn immigrants from the Austro-Hungarian Empire, is to Democrats: a font of heresy. It was Friedman who in 1962, with the publication of "Capitalism and Freedom," first proposed the abolition of Social Security, not because it was going bankrupt, but because he considered it immoral. "We may wish to help poor people," he wrote. "Is there any justification for helping people whether they are poor or not because they happen to be a certain age?"

Not as far as I am concerned.

President Bush's proposal to incorporate private accounts in the giant retirement program is easily traced to Friedman. "He's the originator of it and all the discussion can be traced back to him," said the Cato Institute's Michael Tanner, a leading advocate of partial privatization. "I've always been opposed to Social Security," Friedman said in a recent interview at his home in San Francisco. "I think it's a very unethical program"...

You are absolutely right

Friedman calls Social Security, created by President Franklin Roosevelt in 1935, a Ponzi game. Charles Ponzi was the 1920s Boston swindler who collected money from "investors" to whom he paid out large "profits" from the proceeds of later investors. The scheme inevitably collapses when there are not enough new entrants to pay earlier ones. That Social Security operates on a similar basis is not really in dispute. Paul Samuelson, who won his Nobel Prize in economics six years before Friedman and shared a Newsweek column with him in the 1960s, called Social Security "a Ponzi scheme that works." "The beauty about social insurance is that it is actuarially unsound," Samuelson wrote in an oft-quoted 1967 column. "Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in ... A growing nation is the greatest Ponzi game ever contrived."

But like all Ponzi schemes, it will eventually collapse

"Everybody goes around talking about the problems created by the declining number of workers per retiree," he said. "How come life insurance companies aren't in any problem?" The question is quintessential Friedman: simple, accessible and formidable. Life insurance companies take premium payments and invest them in factories and buildings and other income-producing assets, Friedman said. These accumulate in a growing fund that can then pay benefits. Social Security, by contrast, operates pay-as-you-go, collecting payroll taxes from workers that immediately go to pay retirees.

And that is why the baby boom is going to sink Social Security.

The biggest misconception about the program, he argues, is that workers believe it works like insurance, with the government depositing taxes in a trust fund. "I've always thought it disgraceful that the government should be essentially lying about what it was doing," he said. "How did you ever get the Democrats, who supposedly were in favor of progressive taxation, to pass a tax that is biased against low-income people - - which is on income up to a maximum and no more?" he asked, referring to the $90,000 ceiling on which Social Security taxes are levied. "Only by clothing it in this idea that it's not really a tax, it's an insurance payment."

But now they want to raise that insurance payment on the rich

Asked why, if Social Security is so terrible, it is the most popular government program in American history, Friedman replied, "Well, because why does a Ponzi game work? It's easy to understand why it's popular. So far, on the average, retirees have gotten more out of the system than they put into it. " What about the fact that Social Security has reduced poverty among the elderly? "Well," he replied, "what it has done is transfer a lot of income from the young to the old. It is certainly true it has made the old people of the United States the best treated old people in the world." But why is that a bad thing? "Oh," he replied. "It's not a bad thing for them, but what about the young?"

What about the young is the exact problem. There is no way that when it takes 2 workers to pay for each retiree, people are going to be willing to keep it going, so when the young retire there will be nothing for them.

Betsy Newmark blogged The San Francisco Chronicle visits the 92-year old Milton Friedman who sounds as sharp as ever. He asks a pointed question about Social Security.

"Everybody goes around talking about the problems created by the declining number of workers per retiree," he said. "How come life insurance companies aren't in any problem?" The question is quintessential Friedman: simple, accessible and formidable. Life insurance companies take premium payments and invest them in factories and buildings and other income-producing assets, Friedman said. These accumulate in a growing fund that can then pay benefits. Social Security, by contrast, operates pay-as-you-go, collecting payroll taxes from workers that immediately go to pay retirees.

Pejman Yousefzadeh blogged This is an excellent profile