And So It Begins
As Don pointed out today, this is just a transfer (and of paper), so it might be better to look at the actual effects on productivity. Suppose that benefits don't get cut (because of the political power of the elderly). With less tax money being spent on workers, they get a little less value for their time, so they work less. If tax levels remain the same but are simply spent differently, the effect is small (its not like they were getting much value from those taxes anyay). If taxes are increased, this has a much greater effect.
Then there's health care. As we've already seen, Medicare pays more for the same services than private plans. And like anyone spending other people's money, they are likely to choose procedures with far less efficiency than individuals. This reduces the much-needed incentive for medical cost-cutting.
Yeah, its a transfer, but its a distortion-increasing one, and that's a bad thing.