Why? Would you really say that restricting freedoms generally causes severe psychological distress? What about militaries around the world, that either through volunteer or conscription, severely restrict a soldier’s freedom and requires compulsory training and work? It seems that we are stretching “severe psychological distress” to the point of meaninglessness if simply having your movement restricted and being required to follow some sort of rules and regime based system causes it. There is a difference between stress and “severe psychological distress”.

You've chosen to ignore any of the cases of actually modern reform-based prison systems and instead bring up the late 18th century? Odd choice.

Note that the exaggerated theoretical horrors of Bentham's panopticon are the mundane reality of modern non-prison life under camera and cell phone surveillance.

Being watched by guards isn't one of the top 10 worst aspects of living in prison.