Martin Feldstein Is Dead, Long Live His Critique of Social Security

By Robert E. Wright

Martin “Marty” Feldstein (pronounced Feld-stine), long a Harvard economics professor and head of the National Bureau of Economic Research, the other major economic think tank based in Taxachusetts, died on June 11 at 79 years of age.

Although he was born in November 1939, just six years after AIER formed, his direct involvement with the institution was minimal. Much of his heavily empirical research agenda, however, implicitly endorsed key AIER positions: lower taxes, fewer price and wage regulations, and government fiscal responsibility. A Keynesian mugged by the reality of America’s Great Inflation in the 1970s, Feldstein came to see government as part of the problem, not the solution.

Tellingly, Feldstein was willing to stand up for his convictions. When serving as chairman of the Council of Economic Advisors during the Reagan administration, for example, he openly declared that Reagan’s budget numbers did not add up. He refused to resign over the incident, but returned to Cambridge when his two-year faculty leave expired.

Feldstein also courageously critiqued Social Security and found it wanting in almost every way. His work on the subject, which included Privatizing Social Security, Distributional Aspects of Social Security, and scores of articles, was profound. It deeply influenced my own views on Social Security, which I called “Social Screwity” in my 2010 book Fubarnomics. I do not directly address Social Security in my recent Financial Exclusion due to “been there, done that” syndrome, but the program provides a major example of what goes wrong when the government tries to provide private goods, in this case disability insurance, burial insurance, and retirement annuities.

Foremost, Social Security is a quasi-pyramid scheme that survived, financially speaking, by forcing ever-wider segments of the labor force into its maw, until it became nearly universal. It limped into the present century by means of complex adjustments that decreased benefits and increased taxes. More such adjustments will be necessary if it is to continue very long into the future.

Politically speaking, Social Security survived by means of false advertising. If I had a dollar every time my mother, or some other average American, told me that Social Security was an insurance program, or even a savings account, which they somehow own, I would have a much better-funded 403(b)! In fact, Social Security is a pay-as-you-go scheme that remains in place only because most Americans rely upon it for the bulk of their retirement income and disability coverage. (Thankfully, the burial-insurance segment of the program has not increased in nominal terms and never supplanted industrial or term life insurance.)

As Feldstein and his many collaborators showed, Social Security’s retirement annuities do not benefit the poor on net and help to impoverish African Americans. Although Social Security taxes are somewhat progressive due to the benefit structure, many minority men pay into the system but receive little in return because they die relatively young, often without eligible survivors (wives or children under 18).

Moreover, Social Security is structured as an annuity. Unlike holders of a 401(k), Roth IRA, or other retirement account, Social Security annuitants have no claim to any underlying assets. Once the annuitant and any eligible survivors die or age out, all payments end. The adult children of poor workers, forced to “save” via Social Security taxes instead of ownership of real or financial assets, receive nothing to help them (or workers’ grandchildren, depending on circumstances) to pay for an education or start a business.

African American scholars, especially, know that many young blacks enter their 20s and 30s without much familial financial support. To counter that problem, which of course perpetuates financial exclusion, Darrick Hamilton and Sandy Darity have gone so far as to call for the creation of “baby bonds,” a cutesy misnomer for a federally guaranteed means-tested trust account to be given to each American at birth. When I asked Hamilton last year why we do not simply dismantle Social Security instead, thereby allowing workers to acquire real and financial assets that they could bequeath to their descendants (tax free, of course!), he did not respond.

While self-proclaimed progressives concocted unrealistic policies like baby bonds, Modern Monetary TheoryMMT, and the Green New Deal, Feldstein taught his students and readers to think about economic policy decisions in rigorous ways, backed by hard numbers. He wanted to make the world a better place through better policies, not through well-meaning but heavy-handed, top-down, one-size-fits-all approaches like Social Security, a goal all lovers of liberty can applaud.

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Robert E. Wright

Robert E. Wright is the Nef Family Chair of Political Economy at Augustana University in Sioux Falls, South Dakota. He is the author of 18 books, including a new book on financial exclusion published by AIER.