Harvard Economist: Social Security Decreased American GDP by At Least 3 Percent by 1980


Entitlements such as Social Security change people’s behaviors. Where people expect to be supported by a government program, they tend to work less, retire earlier, save less, and invest less. The world is much poorer because of such programs. The United States (and the world) is less prosperous, much poorer, less productive and less comfortable because of such programs.

For years, some of the most compelling research in this area was done by Harvard Economics Professor Martin Feldstein. Feldstein is very much within the academic mainstream. The author of more than 300 published research articles, Feldstein was widely considered a leading candidate in 2005 to succeed chairman Alan Greenspan as Chairman of the Federal Reserve Board. This point needs to be understood because Feldstein’s findings regarding the impacts of Social Security are truly alarming and “radical,” according to contemporary popular understandings.

In a series of studies beginning in the early 1970s, Feldstein tracked people’s work, savings and investment behavior with an eye toward determining whether people are ultimately enriched or impoverished by the Social Security program. Feldstein concluded that each dollar of Social-Security “investment” (quotation marks quite deliberate) reduces private saving by between two and three cents. In the aggregate, the Program reduces overall private saving by nearly 60 percent. For a 1980 study, Feldstein revised his conclusion even higher, concluding that “each dollar of [Social Security] contribution corresponds to an 87 cent reduction in private saving.” (1980: 11)

But reducing personal saving is not the only negative impact of Social Security. The Program also induces Americans to work less. And most specifically, it induces them to retire earlier (Feldstein 1980: 2). And Social Security is far worse than other types of retirement investments such as tax-free accounts, because “social security wealth is in the form of an annuity; it cannot be used as collateral for a loan; its value depends on future Congressional action; etc.” 1980: 3 n.1

In a few moments of macro-level insight, Feldstein occasionally calculated the impacts of Social Security on American GDP. He found in 1980 that American GDP—the entire output of the country—had been reduced by 3.2 percent by the Social Security program (1980: 10).

We think these figures actually understate the problem. Social Security and Medicare have cost Americans untold abundance and prosperity.

SOURCE: Martin Feldstein, “Social Security, Induced Retirement, and Aggregate Capital Accumulation: A Correction and Updating,” Working Paper for the National Bureau of Economic Research, November 1980.