What Greenspan Got Right: Welfare is Toast

23.01.2017 • The Economy

Vern Gowdie – The Daily Reckoning (Australia) –

It’s official, Donald Trump is the 45th US president.

His inauguration speech was full of patriotic fervour, aimed squarely at his heartland.

He faces a herculean task to ‘Make America Great Again’. This is not the 1950s: the era of low debt, cheap oil, high birth rates, minimal health and welfare commitments, and the US dominating world manufacturing.

That once-young, lean, mean economic machine is now ageing, over-indebted, bloated with entitlements, loaded up with underfunded private pension plans, and competing against countries that pay their workers 1950s-US wage rates.

As we saw with Obama, rousing, well-crafted speeches are one thing, but taking action is another. Obama was hopeless — public debt has doubled, Obamacare is an expensive joke, and bureaucracies have become bloated.

Trump is overpromising, and will under-deliver…but it will be entertaining to watch.

When meeting former Federal Reserve Chairman Dr Alan Greenspan last Tuesday, he said entitlement spending was ‘non-sustainable’. I agree.

The two-part series titled ‘Farewell Welfare’, published in The Daily Reckoning, elicited a good deal of reader responses.

The essence of the articles was that the welfare system is funded courtesy of today and tomorrow’s taxpayers. There is no government ‘social security fund’ set aside from which welfare is paid.

With the ranks of age pensioners swelling, thanks to retiring baby boomers and increased life expectancies, future taxpayers are facing the prospect of an increasing percentage of their hard-earned money being pilfered in order to fund the antiquated age-pension system.

The standard response to justify receiving an age pension is, ‘I’ve paid taxes all my life.’ The brutal and harsh reality is: So what?

Those taxes were used by the government of the day to fund whatever programs they sought fit to include in their budgets at the time. There is no provision for a social security fund in the budget (this was a contentious point with some readers — more on that below).

The simple equation with welfare is: One person’s benefit payment is another person’s taxes.

The more people who gravitate to the welfare side of the equation, the greater the amount the worker is required to surrender to the taxman.

My point is that the next generation and the generations that follow are not going to be overly keen about sacrificing a greater amount of their income to pay pensions to ageing boomers.

In the next decade or two, access to an age pension is going to become much more difficult. Relying on the age pension to partially fund your retirement is destined to end in disappointment…that’s the cold, hard reality.

The ‘Social Security Fund’

Some readers agreed the welfare system, as we know it today, is unsustainable. They also see necessary, but unpleasant, changes to the system in our future.

Others wanted to highlight an error in my statement that there is no ‘social security fund’ provisioned for in the budget:

Dear Vern Gowdie,

After reading your Daily Reckoning 9 Jan 2017, my Heckles went up, as they do every time I hear people talk about Pensions, Privilege and Entitlement, The young supporting the Age Pension, no Taxes set aside for the provision of future pensions, etc.

In 1946 Prime Minister Chifley agreed and established The National Welfare fund as at 1/1/1946. He increased each Australian worker’s Income Tax by a rate of 7%. This 7% went straight into the Pension Fund so that at the time of your retirement you had that for your own pension over the time of your working life. Each working Australian was entitled to receive an Age Pension on Retirement as it was basically self funded.

I turn 65 this year and have worked since 1968, therefore I have been paying 7% of my Taxable Income for 49 years, plus the interest that it would of made over that time. I guess that would make people feel they were entitled to their own money. Not the Government’s. Not the Taxpayer’s and not the Young, but your own.

Unfortunately as Governments changed and we were run by a mob of Gooses (not geese) who couldn’t keep their GREEDY, THIEVING little mitts off our money, the money in the Fund dried up and now there’s none.

It’s disappointing that our Governments since 1946 didn’t have the foresight and initiative that Ben Chifley and Robert Menzies had.

Although there is no longer a Welfare Fund, we are still paying that 7% that they increased back in 1946. They never gave it back. They never do.

You may well say that then was then and now is now and you would be perfectly correct, but please read the article that I have attached and wonder no-more why people feel that they are entitled to the Age Pension because “I have paid taxes my entire life.”

Also while I’m venting, have you ever found it funny or strange that we hear from the Government and the Media that Pensions have to be cut. There are not enough funds in the Government Coffers to fund the Aged etc., however, we never hear about the Government not having enough money to fund Illegal Immigrants or Over Seas Aid. They seem to find the money for Non Taxpaying, Non Australians easier than they do for Taxpaying Australians. Why is that? I find that extremely strange.

Regards

Kevin

Kevin is correct. There was once a Social Services Contribution tax that went into a National Welfare fund.

Here’s a direct extract from the Australian Bureau of Statistics’ 1988 Yearbook article titled: ‘History of Pensions and other Benefits in Australia’ (emphasis mine):

There was a further development of specific relevance to social security in 1945. The Commonwealth split the personal income tax into two components. One, the social services contribution, was to be used exclusively to finance social security cash payments. Revenue from the contribution was paid into the National Welfare Fund, from which all such cash payments were to be made, but there was no link between personal contributions and entitlements. The fund was supplemented by subventions from payroll tax and general revenue. In the event, the social services contribution was again merged into a single personal income tax in 1950. All cash payments are now made direct from general revenue.

Yes, there was a brief five-year period when politicians decided to be accountable by provisioning for age pensions. That all ended in 1950.

For the past 67 years, taxes have all gone into the one pot…to be spent or squandered by a procession of Liberal and Labor governments.

The legislation may still exist for the Social Services Contribution levy. But that’s academic. The reality is that there is no such fund.

Maintaining the fund and paying for the government services of the past seven decades would have required taxes to rise by 7%…no one was too eager to pay this added impost.

This extract from the 2016 Federal Government Budget shows, in cold hard numbers, what taxpayers face in the coming years.


Source: 2016 Federal Government Budget
[Click to enlarge]

Kevin rightly points out the areas of government waste that get the public stirred up. However, in the grand scheme of things, these really are ‘small change’, so to speak…don’t get me wrong, I’m all for tightening up on any waste, but we have to deal with facts, not emotions.

And the facts are that the three biggest expenditure items of 2016/17 are:

  1. Social Security and welfare: $158.6 billion

  2. Other purposes (GST payments to the States, plus interest-cost on debt): $89.1 billion

  3. Health: $71.4 billion

Welfare and health account for $230 billion of the $450-billion expenditure.

Cast your eyes to the right of the table; the welfare budget is forecast to be $191.8 billion in three years’ time…a 21% increase. Over the same period, the health budget is expected to increase a little over 10%.

Clearly, an increase in welfare payments of this magnitude is unsustainable.

The problem is that most people take the provision of these services as a given, without truly appreciating the source of funding.

In my opinion, it is unfair for my generation (the baby boomers) to indenture our children, and the unborn, into a tax servitude they have no say in.

We should be mature enough to have the debate on how best to maintain a social security support system without creating an environment of resentment among the younger generations.

Unfortunately, self-interest means that this discussion is unlikely to happen without a great deal of emotion and threats of backlash at the ballot box.

Political inertia and points-scoring means Canberra will provide very little leadership on this growing problem.

Therefore, as is usually the case, we wait for the system to break before we try to fix it — like the smoker who decides to quit after being diagnosed with lung cancer. Sadly, by then, too many people will be addicted to welfare. Being forced to quit or reduce the intake will prove to be very painful.

As you can see from the budget expenditure table, welfare has become pervasive and costly. It’s hard to imagine what life was like without it.

To give you a quick insight, here’s another extract from the ABS 1988 Yearbook article:

At the turn of the century there was no social security system in Australia. Charitable relief was provided to needy persons by voluntary organisations, in some cases with the assistance of government grants. The main areas of need which attracted charitable assistance were the “sick poor”, neglected children, old people who were destitute and women who had been deserted or who had ‘fallen’ pregnant. The unemployed were assisted by grants of wages, or rations, in return for relief work provided by the government.

Over the past hundred years we’ve come a long way in how we care for the needy, sick, disabled and aged in our society. This is a good thing.

But too much of a good thing has sown the seeds of its demise. Welfare has morphed into entitlement.

Welfare Ponzi Scheme

The sheer number of welfare recipients means that the system we’ve created over the last century is unaffordable…it’s a Ponzi scheme. Unless there’s a rapid increase in the taxpayer base — more skilled immigration — the system is doomed to fail.

And immigration is the very thing that’s causing political backlash in Britain, Germany and the US. What a conundrum.

No reasonable person wants to go back to the days of yesteryear. But the world of tomorrow — with a tax base unable to support a welfare apex — demands that we take action today to lower people’s expectations.

Adopting a mindset of saying ‘farewell welfare’ will enable you to act, rather than react, when the inevitable changes are forced on retirees.

Any change to the contrary will be a pleasant one. But I would not be planning on it. Ponzi schemes always collapse.

-Read more at www.dailyreckoning.com.au-

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