Posted on 09/23/2010 6:37:44 AM PDT by Notary Sojac
In an op-ed in the Wall Street Journal, AEI President Arthur Brooks and Representative Paul Ryan (R-Wisconsin) discuss why America continues to have big government even though Americans consistently tell pollsters that they’d prefer smaller government. The Left answers that Americans suffer from some form of cognitive dissonance, in which they retain nominal loyalty to an outmoded view (from the Left’s perspective) of the government’s role , while in practice embracing the benefits of expansive government.
Brooks and Ryan answer that, despite Americans’ broader preferences, elected officials present the public with marginal choices in which bigger government always wins. Feed hungry children? Check. Keep grandma out of poverty? Check. Once you check enough of these boxes, you end up with big government even if you say you’d prefer something smaller. Brooks and Ryan argue that citizens need to be presented with larger, macro-oriented choices rather than incremental ones, since only with big choices do voters focus on the larger decisions that need to be made. I agree with this strategy.
Brooks and Ryan argue that citizens need to be presented with larger, macro-oriented choices rather than incremental ones.
But I think there’s an alternate explanation that may better account for the growth of government and also show why that growth is so hard to stop. While aid for vulnerable groups obviously drives a lot of government spending, we could lift every American, young or old, above the poverty line with government transfers of around 1 percent of gross domestic product (GDP). Yet the federal government today spends more than 25 percent of GDP. Big government isn’t generated by caring for the truly poor; after all, despite spending 25 times more than needed to fill the poverty gap, we nevertheless leave millions in poverty. Rather, rising pension and health spending on middle- and upper-class Americans—principally through the Social Security, Medicare, and Medicaid programs—is the true fiscal burden and the largest imposition on personal choice and freedom. Without these three programs, the current size of government would be much smaller and the dangers of future fiscal catastrophe due to rising spending and debt would be all but eliminated. The question is: How did we get here?
One answer is that rising spending is facilitated by how we finance entitlement programs; under a “pay-as-you-go” approach, legislators promise benefits before funding them producing an inexorable upward creep in total costs. This contrasts with private-sector pensions, which are generally pre-funded. Rather than amassing assets to fund obligations as they are generated, entitlement programs generate benefit obligations today, which are paid for out of tax revenues tomorrow. For instance, by working today I become entitled to Medicare benefits in retirement, but those benefits will be financed by taxes future workers will pay.
Big government isn’t generated by caring for the truly poor; after all, despite spending 25 times more than is needed to fill the poverty gap, we nevertheless leave millions in poverty.
Why does this matter? The universal pattern for entitlement programs is to start small, then grow. Initial benefits or eligibility may be modest, keeping today’s costs low. But over time benefits and eligibility rise, raising costs alongside them. When benefits are financed on a pay-as-you-go basis, current taxpayers can be promised a generous benefit in future years in exchange for only modest payments today. Once today’s taxpayers reach retirement they feel fully entitled to their benefits, even if the taxes they paid were nowhere near enough to fund the benefits they will receive. (I calculated that a new retirees’ lifetime Medicare benefits will be about $100,000 more than the taxes he paid while working.) We have heard even Republican politicians say that current retirees paid Medicare taxes during their working years and therefore deserve every penny of their benefits in retirement. The fact that the taxes paid aren’t nearly enough to finance the benefits promised falls by the wayside.
All our entitlement programs promise overgenerous benefits relative to current taxes, and in theory can be resolved either by raising taxes or reducing benefits. But because beneficiaries have been told they paid for and earned their benefits, they present a pseudo-moral case for raising taxes rather than reducing benefits. (A true moral case would exist if beneficiaries actually had paid taxes sufficient to fund their benefits.) Pay-as-you-go financing biases policy toward promising rising benefits over time and biases politics toward raising taxes to whatever level necessary to pay them.
Rising pension and health spending on middle- and upper-class Americans is the true fiscal burden and the largest imposition on personal choice and freedom.
One would think that, if pay-as-you-go financed programs bias policy and politics toward unsustainably large benefit obligations and tax levels, the solution would be to switch entitlements toward pre-funding. In a pre-funded program, citizens receive only the benefits that they as a cohort are willing to pay for. There is no way for today’s voters to shift massive costs onto tomorrow’s taxpayers.
But here the effects of pay-as-you-go financing are most insidious. As I noted in a recent National Review column on why Social Security reform has proved so difficult, shifting from a pay-as-you-go program to a funded system entails significant “transition costs,” which are borne by the very citizens who would decide to make the change. Since today’s Social Security, Medicare, and Medicaid benefits are paid from today’s taxes, if we decide to pre-fund these programs then the current generation must pay twice: first for current beneficiaries, and second for their own benefits. Put simply, to shift from an unfunded program to a funded program, someone must contribute extra funds. When the defining characteristic of domestic policy has been for voters to shift their own cost burdens to future generations, it is highly optimistic to expect current voters to accept a double burden. The expected result is to kick the can down the road, such that deficits grow and future taxpayers become even worse off. My own take: it was the transition costs associated with Social Security personal accounts, more than the risk of investing Social Security taxes in stocks, that doomed President Bush’s 2005 reform drive to failure.
Rising spending is facilitated by how we finance entitlement programs: legislators promise benefits before funding them.
In a pre-funded program, we can change the size and the form of the system at any time without incurring large costs. For instance, a fully funded, defined-benefit pension system could shift to a defined contribution program of personal accounts without cost. Likewise, if a fully funded plan decided to increase its size and generosity, the plan must immediately begin amassing extra assets to fund those extra benefits. These disciplines are largely absent in programs financed on a pay-as-you-go basis and, in my view, account in large part for the current level and projected growth of government.
Brooks and Ryan are right to argue for big choices, since it is only by confronting these choices that we can arrest creeping statism. But having looked at how we got here, those who value individual and economic freedom have a difficult task at hand in resolving this issue.
We have heard even Republican politicians say that current retirees paid Medicare taxes during their working years and therefore deserve every penny of their benefits in retirement. The fact that the taxes paid aren’t nearly enough to finance the benefits promised falls by the wayside.
But because beneficiaries have been told they paid for and earned their benefits, they present a pseudo-moral case for raising taxes rather than reducing benefits. (A true moral case would exist if beneficiaries actually had paid taxes sufficient to fund their benefits.)
I have repeatedly knocked heads with Freepers who have fallen into the "I paid into it and now I'm entitled to it" trap. And if Freepers feel this way, what hope is there for the electorate at large??
bookmark
The media collude with individual and institutional beneficiaries of Federal legislation, to defraud We the People.
The primary function of the alternative media, IMHO, is to put an end to this charade.
Government keeps growing because of the incompetence, corruption, selfishness, greed, love of power and control and ‘perks’ of those elected to public office. The main culprits are those in Congress.
It also grows because of payroll tax deduction. When the government pre-deducts a segment of your paycheck, instead of people having to write out a tax bill every year, the impact of what the government actually takes from us is blunted.
There is not nearly enough detail here to determine if this is accurate. Was the time value of money considered? $1 (in 1950) is not nearly the same thing as $1 (in 2010). What discount rate was used? If you use a rate of about 8% (what one can get in the stock market over the long term), I am sure that retirees' lifetime Medicare benefits would be FAR less than they paid in.
Governments are like weeds in a garden, both grow and choke out the good plants. The only solution is to remove the weeds.
but those benefits will be financed by taxes future workers will pay.
Herein lies the problem, look at it this way, the lock box, the trust fund. You know, the money locked away growing because it is invested, to pay for future benefits.
The problem is, there is no trust fund and the lying politicians know it because they spent it. If you are going to have a benefit, you gotta have a trust fund.
BUT, as with any trust fund, think UNIONS, the big pot at the end of the rainbow is just waiting for some enterprising individual or group to begin the fleecing. We done been fleeced, and so the benefit must end, and the price paid by the crooks in congress. Unfortunately the prison sentences will have to be posthumous.
Denigrate, defund, dismantle, destroy totalitarian programs.
It is impossible to introduce into society a greater change and a greater evil than this: the conversion of the law into an instrument of plunder. Frederic Bastiat 1801-1850
The natural state of government is continuous growth. Those in leadership roles naturally want to expand their control, both in the public and private sector. The public sector has the power of coercion, which the private sector does not. So what you have is a continuous struggle for power between the private sector and government, and the government always wins, because they alone have the power of lawmaking.
Look at the history of government through the centuries. It is a history of overreaching, of control, of oppression. It is only though concerted effort that government growth can be stopped.
You can classify me as an old coot sucking at the govt teat if you want......but I want every dime I paid those bastards over the yrs!!
Demographics are the killer here. A system that works beautifully with a 5:1 worker to beneficiary ratio will become a smoking pile of wreckage at 2:1.
Those who worked in the fifties, sixties, and seventies paid a pittance compared to what they are drawing out.
bump
it’s pretty simple...growing legions of people who are attracted like a magnet to the idea of relatively cushy jobs with above-market pay, tons of vacation, primo benes and airtight job security
We are going to see massive Medicare service cuts over the next dozen years, or equally massive tax increases, regardless of who sits in the WH or in Congress.
And whining about "death panels" won't make the cuts go away.
“Larger, macro-oriented choices” used to be called “principles.”
but those benefits will be financed by taxes future workers will pay
Not only can you not depend on benefits not backed up by money invested, from present employees.
You cannot depend on how many future employees there will be.
For that matter what future employees are able to pay.
The money must be confiscated from present employees for future benefits otherwise there is no time for those funds to grow to the size needed in the future.
Unfortunately as you have stated, we have been overcome by demographics, without the funds in the bank and the time to recover.
Can you imagine the screams of agony if the dems were to come clean and tell the American people exactly what they have done. First they squandered billions in the housing debacle, and now they need to tell the public that SS is dead for the next ten to twenty years. I can’t wait, and I didn’t mean to leave out Republicans who are also responsible.
Why does it grow, and grow, and grow?
Might as well ask why a cancerous tumor grows. That’s its nature. It grows until it kills its host, or weakens the host until it can’t be sustained. It’s just that simple.
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