First published in Flourishing May 2011.
Louis XIV was King of France for seventy-two years, and though he was not the worst of Kings, he did lead France to the brink of bankruptcy through his lavish and self-congratulatory spending. Mark Twain famously said that history doesn’t repeat itself, but it rhymes. Indeed.
We Americans are about to begin a national discussion of that vast, unfunded taxpayers’ liability known as Social Security. (The discussion is bound to include all entitlements, but for the sake of simplicity, I’m focusing on Social Security.) For that discussion, we can thank President Obama’s National Commission on Fiscal Responsibility and Reform1. Even the Social Security Administration confirms that sooner is better than later. (See inset p.2)
For the better part of seventy-five years, most people have believed that their Social Security contributions were being set aside for their retirement. Not for one second did my father believe that his pension checks came from his children’s pockets. But in fact, they did. The money he had deposited into Social Security had been spent for programs and projects designed to assure an abundance of goodies to a mixed assortment of voting blocks. That process continues unabated and enhanced today. And, in that process and others of equal deception, we have become a collection of political pawns, bribed and manipulated with our own money.
Unlike in my father’s time, virtually everyone knows today that there is no Social Security “lockbox”. There is, instead, an unfunded liability awaiting the American taxpayer of this and succeeding generations in excess of $7.7 trillion2. That’s just for Social Security, which is itself dwarfed by the unfunded liabilities of Medicare, etc. I know what Dad would say about that: “Holy smoke!” But, he was a better man than I am.
I don’t need to tell the readers of this newsletter that one of the most important motivations for private saving and investment is the need to provide for—you’ll forgive the anachronism—old age. As in my father’s case, one “unintended consequence” of Social Security has been to create the illusion of saving and to reduce the apparent need for disciplined investment in IRA’s, 401(k)’s, and other retirement savings opportunities. Not surprisingly, the rate of saving in the United States has declined precipitously over the past seventy-five years.
The Social Security system has not only served to undercut the motivation to provide for old age and retirement by means of private saving and investment, there is a second “unintended consequence”. It has also impaired the average American family’s ability to actually do so. OASDI withholding (7.65% of wages and salaries) is nearly double what the average family spends on gasoline3; and I’m not counting employers’ contributions to Social Security. Each of these two “unintended consequences” were entirely predictable—and were predicted by free-market economists4—but it gets worse.
Ask yourself this question: “What if the money paid into Social Security had actually been invested in real, physical capital assets—American business enterprises, for example—instead of taxpayer-backed IOU’s?” The answer is that in a relatively free economy, that investment really would have been the source of future financial security, just as private savings and investments are today. Instead, three generations of King Louis wannabes have created a promise to levy unfathomable taxes on future generations, while they consumed the Social Security tax revenue that should have gone into saving and investment. Now, the future has arrived; and it’s us.
At the most basic level, the coming debate about entitlement reform will serve to highlight a conflict of philosophies. America was founded on the philosophy of Individualism; of the unalienable right of each individual to pursue his own happiness in his own way, asking only that he use neither force nor fraud in that pursuit. Social Security—and Medicare, Medicaid, and Obamacare, as well—are premised upon the philosophy of Collectivism or Social Contract6; of subordination of the individual’s freedom to a presumed and so-called “greater good.”
The scarcely concealed premise of collectivism, though, is that the average individual is too stupid or too lazy to plan and manage his own life; and therefore, he must rely on the government to rescue him. In practice, we now know, when the power of government intervenes between the real providers—the people whose work, savings, and investments are ultimately to be taxed—and the receivers, “to rely” becomes “to demand”. This is amply illustrated today by the European PIIGS (Portugal, Ireland, Italy, Greece, and Spain). Are we next?
The first step in any recovery is to recognize the problem. With the report and recommendations of President Obama’s National Commission on Fiscal Responsibility and Reform, we can now see clearly that the consequences of lavish entitlement programs—not just in Europe, but here, too—are the eventual economic destruction of the nation through the undermining of real saving and the compounding of the national debt. The bond rating agencies have issued their warnings, too.
There is also, I’m sorry to report, the potential for geriatric holocaust. That will be the result when millions of elderly people—the Baby Boomers, most likely—without savings of their own, wake up to find that their children and grandchildren have grown tired of supporting them; or are simply unable to do so.
So yes, just as the doomsayers tell us, we do face a growing debt threat of runaway inflation and/or worldwide deflationary collapse. But, the doomsayers underestimate the American people. We’re only beginning to see the nature of the game that’s been played by our King Louis wannabes, and we don’t like being pawns. Moreover, we won’t submit to the indignity of stealing our grandchildren’s future. We’re better than that!
The history of American free enterprise informs us that for every human need and desire, a free-market solution will sooner or later emerge, that is better and cheaper than anything that government can provide. And, with the report of the National Commission on Fiscal Responsibility and Reform to prompt and guide us, we’ll soon begin the tortuous process of dismantling and replacing Social Security, Medicaid, Medicare, Obamacare, and other bankrupting entitlements with free-market solutions. In that process, which will take a generation or more to complete, we’ll reignite the entrepreneurial flame that defines America, and put every adult citizen back in charge of his or her own life. ….Now, I can hear someone asking, “But, what if…?”
Call me an incurable optimist, or just call me stubborn—I see myself as a student of history: If the federal government defaults on its debt, or if the Federal Reserve creates a runaway inflation, or both; history tells me that I will—more than ever—want to rely on myself, and on the earnings and resources of America’s great companies, to secure my livelihood and protect my family’s future. mh
- Man vs. The Welfare State, Henry Hazlitt, Arlington House, 1969.
- Leviathan, Thomas Hobbes, 1651.