The Modern, Expanded Welfare State’s Math Woes, Part I

Americans and Western European taxpayers beware.

You’re behind on your bills. If your government continues its reckless spending, you and your children and your children’s children will be on the hook. They will have to pay more in taxes and get less from your cradle to grave welfare state.

The welfare state’s free and easy spending—based on the idea that the government must always expand—is a concept generally subscribed to both major American political parties over the past 75 years. The only difference between two parties is over how quickly to expand our leviathan state as proven by a sleazy bi-partisan deal of 42 years ago that I will later detail.

These easy spending welfare state policies have threatened to bankrupt some European nations. The effect of this statist, government must do more and more for everyone, philosophy is felt here in Nueva York, the Empire State.

For instance, there’s a 20 billion dollar hole—or what is called underfunding—in the New York State retirement fund, which pays the pensions of state and municipal workers. One of the problems, said state officials in their annual pension fund report which I read as I prepared a recent story for the New York Post, is the rate of people collecting pensions is increasing faster than those paying into the system.

How did that happen?

Politicians in hot pursuit of votes try to top each other in making outrageous campaign promises. These are promises that are often beyond the average government’s ability to pay. All the bills can’t be paid by one generation. So today’s pols just send the bills on to the next generation. Complicating the problem is the trend of every nation with high living standards: Population increases at a slower and slower pace. And, in some cases, population becomes static.

This happens at the same time that people are living longer. Fewer taxpayers. More people collecting from the tax system based on the many years they “contributed” tax dollars (Ahem!) to their mandatory retirement systems.

At one time, there were some 10 workers paying into the mandatory U.S. Social Security system for every person collecting. Now we’re heading in the direction of just three or two workers paying for each person collecting. That is unsustainable unless payroll taxes, raised many times over the past thirty years, are greatly increased.

Besides a declining birth rate, how did we get into this Social Security mess in the United States? One part of the answer is politics. The latter is the temporary insanity that overtakes some career pols who will say or do almost anything to win an election.

In 1972, a republican president, Richard Nixon, and a Congress controlled by the opposition party both decided the best way to win elections was to greatly expand Social Security. The payment rates were increased by 20 percent and automatic cost of living adjustments (COLAs) were added.

It was great election year politics since elderly people are well organized and have higher voting rates (For example, I am a geezer. I have written at this site about how I never miss a vote because I always loved the circus clowns). Unfortunately, it was lousy long-term economics. I wrote about it a few years ago.

http://mises.org/daily/344

So, without doing any long-term projections of what their promises would costs taxpayers over the next two or three generations, both the democrats in Congress and a republican president, who was trying to appeal to people who normally wouldn’t vote for a republican, agreed to expand the program just in time for the elections of 1972.

Again, politically it was a terrific move. Both Nixon—-who was re-elected with the backing of 49 of the 50 states—and the overwhelming majority of democrats in Congress won. Unfortunately, their huge promises—-which few at the time seriously considered how much they would cost taxpayers—-were passed on to generations to come: you and me as well as future taxpayers.

Would any responsible individual or business enter into an obligation to pay a bill over decades without understanding the price tag? (By the way, this wasn’t the first time, just the worst example of welfare state politics. Congress and presidents, in the 1950s and 1960s, often raised Social Security payments, just before elections).

The problems aren’t much different in other advanced welfare state democracies. In fact, in countries with low birth rates and recent slow rates of economic growth, such as Japan, France, Italy and Spain, the problems may be even worse than in the United States.

But we’re all traveling the same road to economic disaster. Indeed, in 2000, the Kerrey-Danforth Entitlement Commission warned that the day was coming when Congress would have little discretion over spending—almost the entire federal budget would be eaten up by Medicare/Social Security spending. http://www.ssa.gov/policy/docs/ssb/v58n2/v58n2p74.pdf

Yet Social Security was once a cash cow that generated far more in tax dollars for the federal government than it had to pay out. Economist Paul Samuelson once bragged in Newsweek Magazine that an exploding birthrate could solve all the problems of the Social Security system.

And given, the exploding birth rate of the 1960s combined with some strong years of economic growth along with frequent tax increases, the Social Security system seemed as attractive as a lovely village. But it was a Potemkin Village. Indeed, for many years, took in more than it paid out. The profits, which should have been put aside to protect future generations, were dishonestly used by the government to pay for almost anything other than Social Security.

But, with an economy experiencing slower growth and with more people retiring and fewer new workers coming into the workforce, the cash cow is dead and rotting. In fact, over the last two years the system has started to run in the red. The federal government is now paying out more in Social Security benefits than it is collecting in taxes.

Unless the generation behind us likes taxes and more taxes, the future looks bleak. What should be done? More in part II.

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.