The Half-Life of the Welfare State

Originally Published in Flourishing August/September 2011

Social Security is projected to exhaust its trust fund in 2036. Medicare will be out of cash in 2024. Technically speaking.

In reality, both systems are already in the red, because there are no actual assets in those trust funds; only government IOU’s. As Social Security and Medicare begin to pay out more than they take in from payroll taxes, they’ll scarf up virtually the entire federal budget and guarantee a steady increase in our already dangerous national debt. Add to that the current low interest rate environment (0-2%), and ask yourself what happens when we’re paying a more normalized 5% rate on upwards of $17 trillion.  Why else do you think the Federal Reserve is determined to keep rates so low?

Everyone already senses this, of course, but most people don’t yet understand that the current budget crisis heralds the beginning of the end of the Era of Entitlements.  Though Social Security has been around since 1935, the growth of cradle-to-grave entitlements accelerated in the 1960’s and ’70’s, when we decided that we  could subsidize everything for everybody. From education, to housing, to medical care, to food stamps, to the arts and entertainment, to retirement; a consensus of Americans decided that a policy of “from each according to his ability, to each according to his need” would be a fine thing. The wealthiest among us would somehow pay for it all.  Or most of it, anyway.  But it was an illusion. The 2009 Patient Protection and Affordable Care Act  (PPACA) was the last gasp grasp of that philosophy, and because the American people—having finally realized who would really pay—overwhelmingly opposed PPACA, it had to bullied through Congress in the dark of night.  That Act, following hard upon the government-led bums’ rush into housing (1995-2006), and the subsequent $trillions wasted on bailouts and stimulus packages have pulled back the curtain.

So, we’re now intimately acquainted with the life cycle of the entitlement hoax. Benefits, bailouts, and tax breaks are passed by the Congress and millions rush to claim them.  Marginal taxes rates can never be raised fast enough to keep up with an unending stream of entitlement promises without triggering a recession, so Congress makes up the difference with massive deficit spending and an ever-increasing debt burden—and we get a recession, anyway.  The Federal Reserve sops up the government’s debt with an increasing supply of inflationary electronic dollars—until we reach the point where we are now.  Over a (pork) barrel.

The task of our generation, and perhaps the next, is to preside over the dismantling of the voracious entitlement monster we’ve created.  We can now see that it was the unprecedented wealth created by the entrepreneurs, savers, and investors of our parents’ generation that made the welfare state seem plausible. In particular, the post-World War II boom in Americaand Europesupported the fantasy that we were rich enough to afford such an immoderate system of cradle-to-grave entitlements.  But, despite the incredible wealth creation of the past sixty years, the Age of Entitlement is now kaput.  We are living in the Age of Recompense.  Without explanation—since none should be needed—let me just assert that that’s a good thing.  It means that working, saving, and personal responsibility will soon be in vogue, and not just for those formerly willing, but for everyone.  Well, I guess that is the explanation, isn’t it?

The science of Physics tells us that a radioactive isotope decays perfectly according to first order kinetics.  For example, the half life of the Carbon 14 isotope is 57.3 centuries, which means that in 5,730 years, one half of any given quantity of Carbon 14 will have decayed into its surroundings.  By its nature, Carbon 14 is physically unsustainable.

As an extreme, and, therefore, educationally valuable case, consider the PIIGS (Portugal, Italy, Ireland, Greeceand Spain).  Over the last forty years, they were all built on the self-same ideal of cradle-to-grave entitlement; and here they are, begging the world for bailouts.  The entitlement philosophy is economically unsustainable, because compound interest, being mathematically akin to radioactive decay, guarantees that sooner or later entitlements will consume all of a country’s capital, and then destroy its credit, too.  With the demonstration and dissemination of that knowledge provided by the sad spectacle of the PIIGS, the remaining half-life of our own welfare state will not be measured in centuries, perhaps not even in decades.  mh