Misdirection of Labor and Capital Under Social Security/Comment

Garrison takes an Austrian School approach to assessing the economic distortions caused by the US Social Security system. It is shown that the neoclassical approach, which focuses on aggregate distortions in savings and employment, grossly underestimates the effects of Social Security. With the Austrian model, distortions occurring at the individual level can be identified. Uncertainty about the future of the Social Security system and fears of its collapse make it impossible for workers to maintain patterns of consumption compatible with their time preferences, and it is difficult for businesses to forecast future consumption demands. Though system reforms based on tax exemptions for private insurance investments can create other economic distortions, they are preferable to the present system, and they are strategically necessary to bring about reform. Burtless comments that private investment alternatives offer no more certainty of return than Social Security, which provides a wide variety of benefits in addition to retirement income.