Out of curiosity, who, specifically, is "they" -- is it the government for government services/taxes, or is it private companies for identifying you for taxation or employment eligibility purposes, or by private organizations (banks, credit cards) as an attestation of identity?

I was mostly referring to banks, but it's also mostly true for government offices (tax offices, retirement agencies, voting stations, also the municipalities if you need some certificate etc.). Technically public officials can authenticate you without photo id, but it's most common to provide one especially outside small towns.