The High Cost of “Free”

Ludwig von Mises Institute ^ | Wednesday, June 05, 2013 | by Loyd S. Pettegrew and Carol A. Vance

[Sopater]

Why does a large portion of the population choose not to work when there are many jobs available? The answer is simple. If you can receive 2-3 times as much money from unemployment, disability, and/or welfare benefits (subsidized housing, food stamps, free cellphones, etc.) as you can from a temporary or part-time job, and live a life of leisure, why work? In 2011, the U.S. government spent over $800 billion[1] on this “welfare,” exceeding expenditures on Social Security or Medicare.

In the Denver arena where Mr. Obama gave his DNC 2008 acceptance speech, a woman in the audience became overwhelmed by the speech and said that she no longer needed to worry if she could make her car or mortgage payments because he would take care of it for her. In Cleveland, a woman claimed that she was going to vote for President Obama again because he gave her a free cellphone (along with a litany of other entitlement giveaways). Before you growl, you should know that the free cellphone program was instated by President Bush in 2008 through the FCC’s Universal Service Fund. Fees for these “free” cellphones are paid by all telecommunications service providers out of the revenue received from their paying customers. Despite the political rhetoric over the past half century, entitlements were actually highest during Republican administrations. The political allure of free is bi-partisan.

The political allure of free is so strong that an alarming number of people choose to become wards of the entitlement/welfare state rather than captain their own destiny. Economist Nicholas Eberstadt of the American Enterprise Institute believes that Americans have become a nation of takers, threatening the self-reliance that has long characterized our national psyche. Eberstadt (2012, p. 4) presents data showing that entitlement payments to Americans, since 1960, have risen annually by 9.5 percent. He argues that over the past 50 years the ever-increasing array of transfer payments to Americans have risen 727 percent. In 2010 such payments alone totalled $2.3 trillion with Social Security (for old age and disability) accounting for 31 percent, Medicare 24 percent, Medicaid 18 percent, Income Maintenance 12 percent, other giveaways (free cell-phones, support for a broken education system, housing, the arts, etc.) 8 percent, and Unemployment Insurance 6 percent (Eberstadt 2012, C1-2). This has resulted in 49 percent of American households receiving one or more government transfer benefits (Eberstadt 2013); this amounts to 18 percent of all personal income and a burden of $7,400 for every American.

The Balance Sheet on Government Giveaways

Our economic analysis shows that retirees who worked for 40 years and then live 20 years past retirement will receive more than twice what they, and their employers, contributed over their lifetime of working. Only retirees who survive a decade or less after their retirement do not take more out of Social Security than they contributed. Most people will agree that the retirees should receive his/her Social Security benefits at retirement. But with people living longer, who will pay for all the additional benefits now promised? Most people who have not done their homework (including Congress) fail to realize that the numbers for Medicare benefits exceed those for Social Security. Since 1965, Medicare required less than a 3 percent contribution from a worker’s gross wages, yet most people receive over $250,000 in medical benefits before reaching the age of 74, assuming no catastrophic illness. You can do the math on your own wages, assuming a lifetime salary of $100,000 per year for all 40 working years, a worker will have paid in only $120,000 into the Medicare system. Congress, after agreeing to take care of everyone after retirement for the rest of their lives, has broken a sacred trust and used incoming contributions to fund other government expenditures, instead of letting the contributions build over the past 50 years.

The Political Allure of Free Runs Parallel with Tough Economic Times

The U.S. Census data show that in 2000 the percentage of Americans existing at or below the poverty level was 11.3 percent or 31.1 million people. The 2010 census showed a 75 percent increase in reported poverty by Americans rising to 15.1 percent or 46.2 million people from the previous census. As with most government statistics, there is ample room for politicized error. For example, when people get laid off from work, there is reason to believe that many join the underground economy and do not report their income. Rahn (2009) reports that 26.5 million households are either unbanked or underbanked (from FDIC data) and that while the economy may be improving slightly, the growth in the underground economy should be decreasing but isn’t.

Another contributing factor is a measure called labor force participation. It is the total work force that includes people working and those actively looking for work as a percent of the noninstitutionalized population. The Reason Foundation’s Randazzo (2012) points to a circularity problem—when the unemployment rate goes down the labor force participation rate should rise. After the recession ended in 2009, both rates are tracking in the same direction—the labor force participation rate was 64.9 percent, the lowest since 1981and the unemployment rate was 10 percent. In 2012 the labor participation rate had dropped to 63.4 percent and the unemployment rate also dropped to 7.8 percent. Randazzo suggests this is because participation in the labor force has been declining for over a decade. Despite President Obama’s recent crowing about jobs, the drop in unemployment has factually less to do with the creation of real jobs than with the fact that more Americans are dropping out of the workforce for the allure of free things from their government. Randazzo believes lower workforce participation will be the labor norm of the future.

Why work if you can’t find a comparable job to what you had before you were laid off and the government will give you free living expenses? We have analyzed what a single parent with three children is eligible to receive from the state and federal governments in a given year, working a part time job at minimum wage living in Florida (a relatively benefit-frugal state). Free and subsidized benefits include: housing, welfare, utilities, telephone, school breakfast and lunches, child care, medical care, food stamps, commissary food, prescription and non-prescription medications, education, education testing, and refundable tax credits. All of these benefits are in excess of $47,000 per year, exceeding the poverty level in Florida by 200 percent.

Researchers at the National Bureau of Economic Research cite studies suggesting that in difficult economic times approximately 30-40 percent of those applying for disability would return to the workforce if the economy were better and disability were not an available option (Autor and Duggan 2006, p. 19).

Choosing Disability over Work

Many people add to their free government benefits through working in the underground economy and pay taxes on none of it. Others choose another free government benefit. Since mid-2010 (the date when millions of U.S. citizens exhausted their 99 weeks of unemployment insurance) the number of workers on Social Security Disability Insurance (SSDI) benefits rose by 22 percent, an increase of 2.2 million people.

Workers with disability now get nearly a 20 percent chunk of the total Social Security benefits budget and the number has increased (Kowalski 2012). Kowalski refers to a government study that shows that 99 percent of people who have been granted SSDI benefits remain on this entitlement the rest of their lives. Economists David Autor and Mark Duggan (2006) argue that the spiral in SSDI claims by the non-elderly adult population is the result of three main factors: (1) Congress has dropped the threshold for receiving disability benefits (inability to function in a work-like setting); (2) Congress has increased the level of benefits for recipients giving people more incentive to apply. (3) Congress increased the number of people in the workforce covered by SSDI (Autor and Duggan 2006, p. 8-11). The allure of free has made the political class very proud of its accomplishments in creating a welfare-dependent state.

When government programs are seemingly free, recipients tend to use them more. Medicare is a perfect example, where pharmaceutical and diagnostic tests multiply with the change in new benefits (Pauley 2004). Research shows that even when controlling for age and medical condition, if medical care is a bargain, people on Medicare as opposed to people on private insurance utilize 50 percent more care (Matthews and Littow 2011). They point to the fact that especially when Medicare patients have supplemental care in the private sector, their out-of-pocket expense nears zero, encouraging even more utilization. They conclude: “Since private insurers are much better at controlling utilization and reducing fraud, why not turn to the private sector to resolve Medicare’s excessive utilization?” (p. A16)

Mises (1990) analyzed this double-edged sword of government dependency and the cost to human value. Today, George Gilder (2012) echoes this risk by pointing out that 70 percent of government discretionary spending devalues human life by paying people to be disabled, sick, reproduce, be unemployed, unmarried, retired, poor, homeless, hapless, or drugged. He believes these supposed problem-solving programs accomplish nothing beyond expanding themselves by spreading dependence and tragic waste and saying: “Reforming them [the first rule of bureaucracy (Pettegrew and Vance 2012)] is all upside.”

[Sopater]

Preaching to the choir, I know...

Good article though. ;-)

[no-to-illegals]

gonna love it when the low information voters find out.

[E. Pluribus Unum]

Free-DOM trumps Free-STUFF every time.

[Sopater]

Only retirees who survive a decade or less after their retirement do not take more out of Social Security than they contributed.

I'm sure our beloved gov't is working on ways to ensure that more people don't survive more than a decade after retirement.

[SMARTY]

“I’m sure our beloved gov’t is working on ways to ensure that more people don’t survive more than a decade after retirement.”

They did it already... they eliminated ‘retirement’!

[justlurking]

Bump for later response. This statement is not accurate if you account for income level. I have a longer explanation, but not on my phone. Reply to me here if you want to be included.

[stylin19a]

the free cellphone program was instated by President Bush in 2008 through the FCC’s Universal Service Fund.

The funed (which once had billions) almost immediately went into the red and is still growing red under Obama.

[Sopater]

...they eliminated ‘retirement’!

For everyone except state/federal workers.

[Sopater]

Reply to me here if you want to be included.

Please...

[tbw2]

The insidious nature of entitlements shows up more and more often. Personal example this week, signing up my kids for summer daycare program. The standard medical waivers and liability forms and contact information is familiar. The sticking point was the “free lunch” program. I refused to fill it out, stating I made too much. The clerk called me the next day, this form is MANDATORY.
I confronted the center director. They said they need this to help pay for food at the center, and enroll everyone. I said this wasn’t necessary, because I make too much to qualify. They said it was mandatory for enrollment. I wrote down “too much” in the income category and finished filling out the form with information like my address, household members and signature.
I don’t want to fill out a form under threat of perjury for a program I do not qualify for in order to use a private service. Yet I was stuck with that because of the childcare center choosing to accept entitlements.

[DuncanWaring]

As Walter Williams puts it, “In order for one person to get a thing without paying for it, another person must pay for that thing without getting it”.

[barefoot_hiker]

You can do the math on your own wages, assuming a lifetime salary of $100,000 per year for all 40 working years, a worker will have paid in only $120,000 into the Medicare system

"Only" $120K. And they conveniently leave out the other $120K paid by the employer (which the employer could have paid to me in additional salary or benefits). And that a prudent person would invest that money and probably end up with a substantial sum that could be passed on to heirs if it was not used during ones lifetime.

[RedStateRocker]

What a pantload.

I got laid off in July 2012.

Let me tell you, unemployment is *NOT* as much as working even the crappiest job. And it runs out.

I worked every crappy job that came my way until I finally got one making 2/3 of what my old one did, but even taking *ANYTHING”, being college educated, 21 years of gainful employment, drug free, yada yada, I damn near exhausted EDD before landing my new position.

Anyone,ANYONE who tries to tell me the unemployed, or those on “welfare” have it better than even the lowliest wage slave is so full of crap they should be slapped hard enough to prevent them ever posting again. Blather and lies form the right are just as bad as blather and lies from the left.

I don’t really care what data or statistics someone comes up with, I’ve been there, and unless you’ve actually BEEN unemployed and TRIED to get by on even the most “generous” benefits sans employment you do not know what you are talking about.

These assclowns dishonor Ludwig.

[itsahoot]

"Only" $120K. And they conveniently leave out the other $120K paid by the employer (which the employer could have paid to me in additional salary or benefits). And that a prudent person would invest that money and probably end up with a substantial sum that could be passed on to heirs if it was not used during ones lifetime.

No fair pointing out the obvious. In fact Insurance providers used to tout the retirement benefit of a life insurance policy, you always got back much more than you paid in.

[Sopater]

ANYONE who tries to tell me the unemployed, or those on “welfare” have it better than even the lowliest wage slave is so full of crap they should be slapped hard enough to prevent them ever posting again.

I do wish that everyone on welfare/assistance felt as strongly as you do. God bless you.

[justlurking]

And that a prudent person would invest that money and probably end up with a substantial sum that could be passed on to heirs if it was not used during ones lifetime.

It's a substantial sum over 40 years -- especially the past 40 years.

If you assume that you would have invested those contributions into long-term Treasury bonds (the equivalent of what the trust funds are invested in), you would have seen double-digit returns during the 80's. After inflation it wasn't that large a return, but if you invested in a 30-year bond, you would still be collecting dividends on some of them.

[justlurking]

I don’t really care what data or statistics someone comes up with, I’ve been there, and unless you’ve actually BEEN unemployed and TRIED to get by on even the most “generous” benefits sans employment you do not know what you are talking about.

The articles I read about this look beyond unemployment, and consider the myriad benefits available, including tax credits.

There are also benefits to families with dependent children that you might not have been eligible for.

[justlurking]

Our economic analysis shows that retirees who worked for 40 years and then live 20 years past retirement will receive more than twice what they, and their employers, contributed over their lifetime of working. Only retirees who survive a decade or less after their retirement do not take more out of Social Security than they contributed.

This is a vast over simplification. If you look at every Social Security recipient, on average, this might be true. But, I don't think so. It also glosses over the fact that the average life expectancy at retirement age is another 17 years. So, the claim that you get more than you contributed after 20 years is really an empty criticism.

There are two factors to consider:

1. The cost of money over time. If you were just putting your contributions into a bank account, you wouldn't expect to earn no interest for 40 years, and only get back what you contributed, after the value has been depleted by inflation.

2. The ratio of contributions to benefits is not linear. Low income retirees get a much larger percentage of their contributions in benefits, while upper middle income retirees get a much lower percentage of their benefits.

I calculated the value of benefits at retirement vs. the value of your contributions at retirement, taking the cost of money into account. Each line represents a return on investments after inflation. Historically, long-term Treasury bond rates have been about 0.5% above inflation, so you can use the purple line to represent the results if you had invested your Social Security contributions the same way the administration did.

My assumptions are a bit different:

• Start working full-time at age 21.
• Retire at 67 (current "normal" working age) after 46 years of contributions.
• Life expectancy is 84 (average, at age 67), for 17 years of benefits.

The purple line crosses 100% at about $4,600/month -- which is very close to the median family income. If your average monthly earnings were less than that, you'd get more than you contributed. If it was more, you would get less.

The point that I'm trying to make with this graph is that you can't use a single point to compare contributions to benefits. Your average monthly earnings have a huge effect on the comparison, because the ratio between contributions and benefits is not linear.

If anything, the graph makes it clear that upper-middle income retirees are subsidizing lower-income retirees.

[RedStateRocker]

With all due respect, walk a mile in my shoes instead of paying attention to pundits, commentators or other such bloviators be they of right or left.

Been there, been through that; the opinions of anyone who hasn’t been unemployed in the last four or five years are not worth spit.

[justlurking]

Been there, been through that; the opinions of anyone who hasn’t been unemployed in the last four or five years are not worth spit.

If you could set aside your bitterness for a few seconds, you might realize that this article is not talking about the short-term unemployed. The article is about "wards of the state" (it even uses that term): people that choose it as a lifestyle, not a temporary situation.

This is someone making a concerted effort to avoid work, and taking advantage of all the subsidies, grants, credits, and benefits that are available. The example in this article is a single parent with 3 dependent children -- which further increases benefits.

Another article posted on FR a few months ago puts it a bit differently: you would have to earn a salary of about $57,000/year, pay all the requisite taxes and still have enough left over to replace all the benefits.

No, this wasn't your situation. But, that's not what this article is about.