As the premise for this short analysis of unfunded liabilities, I shall use the figures put forth by President Fisher of the Dallas Federal Reserve in a recent interview at the Wall Street Journal. His office has estimated the present value of the unfunded liabilities for Medicare and Social Security alone to be in excess of $99 trillion or about seven times our current GDP. Fisher lamented that our political leaders have "dug a very deep hole" for the country.
Most economists agree and believe that we are positioned at a crossroad concerning our country's financial future, as there is no reasonable expectation that we can tax, grow, or borrow our way out of such a crushing, unfunded debt. It is a lethal picture of delusion and idealism that knows no boundaries and recognizes no financial realities. Hauser's Law states that federal tax receipts always fall short of 20% of GDP. That alone makes any suggestion these programs can be fiscally supported divorced from the totality of fiscal prudence. The U.S. has entered into a Faustian model of debt, dependency, and default. It is Ponzi on steroids and the country is the victim!
However, this is not the first instance that the matter of unfunded liabilities for these two programs has been raised to the level of public concern. Neither the reasons nor the solutions are a puzzle. Over four decades ago Milton Friedman, Nobel Laureate in Economics, identified rising medical costs and the coming deluge of 'baby boomers' that would flood the national retirement and medical programs, leading them, and possibly the country, to bankruptcy.
This looming financial disaster for Medicare and Social Security is the progressive legacy of the 'New Deal' and 'Great Society' programs, with their reckless idea of abstract 'social justice'. All government intervention that is state-centered rather than
individual-centered breeds conflict rather than cooperation. Unwisely, our President and the Congress now seem to be on a fast track to turn the country into a disorderly and failed society by increasing entitlements even beyond those enacted long ago. It is galloping socialism in a race to the bottom.
Throughout world history where the state owns or controls the most and the individual the least, these false promises of altruism that revolve around consuming more than one produces are failing and plunging the inflicted societies into financial and citizenry chaos. Greece is a sad but not final example of the 'great' failed promise of equal wealth and equal lifestyle through the forced redistribution of privately owned assets. Even though much of Europe is trying to exit the morass created by the pursuit of socialist ideals that breed a strong sense of entitlement through profligate spending, our current Congress seems to be embracing them. They want to go where Europe has failed.
Medicare and Social Security Erode Personal Freedoms and Liberty
Always prescient, Dr. Friedman tied a large measure of the rising health care costs to the 'free medicine' that was being given as a tax-free supplement to the employee. He described our third party payment system as "... a socialist-communist system of distributing medical care with a communist result." He also identified the problem of Social Security morphing into one's only 'retirement plan' rather than a supplement to one's life savings as eroding the will to assume personal responsibility.
Friedman was always shocked at the arguments that were used to defend these programs. In both instances the workers penchant for personal responsibility was being crowded out and his future put at risk by these largely unfunded federal programs that were relying upon an ever expanding, young work base for financial solvency. Members of congress touted them as 'free' to the recipients and guaranteed as well.
Friedman and others have always opined, supported with empirical data, that in all democracies the application of free market principles to our everyday lives is still the best hope for economic and personal freedoms. Free markets do not accede to power hungry political parties wishing to degrade the individual and make him a ward of the state.
Rather, free markets breed cooperation and allow citizens to act in their own best interest while holding individuals responsible for their personal actions. Such freedom of action renders selfish political power grabs inert. The application of free markets to develop cures for social ills is the enemy of the professional politicians who so invade our lives. They will do or say anything in combating it, as their interests are best served through their control of those programs that entangle us for life.
Friedman's Free Market Solution for Medical Insurance
Friedman's solution for medical insurance is simple: unleash the powerful forces of the American entrepreneurial class by separating health insurance from the employer and thus returning the individual to his rightful place as the first party participant.
Employees would have their present salaries increased by the amount the employer has been paying and they would then be responsible for purchasing their own insurance. Those that wanted to remain with a health plan provided by the employer could do so with an imputed tax liability for its cost. Since the normal cost per employee is approaching $12,000, the employee would soon want control of his health insurance money as he could buy a tailored policy for about a third of that. The vast majority of Americans would opt for a catastrophic policy with large deductibles and that would return the patient/doctor relationship to its rightful place with personal choices and without government interference leading to the bureaucratic rationing of services.
The free market thrust for the health insurance dollars of our over 300 million citizens would be enormous and prices would be competitively adjusted. Reductions would begin the minute a national policy of citizen responsibility for his health insurance was announced. The entire medical field would be in competition and have no choice but to change its pricing structure, as they want and need your business. As in all free market situations, the citizen is now in control of his expenditures and that is a powerful mitigating factor against run away costs. You pay, they play!
For the country to survive the impending bankruptcy of Medicare it has to immediately begin to shift health insurance to the free market and to the individual in order to decrease costs across the spectrum. Obamacare care is quite the opposite of a free market solution and such state based medical care models have never worked in any country and have led mostly to long lines with long waits, waste, insufficient physicians, inferior care, and general patient frustration. Our VA system, even though touted as a shining example of a national healthcare model, one that I have been a participant since 1961, is a prime example of a state-run system that is riddled with the above.
Friedman's Free Market solution for Social Security
Again, Friedman's free market solution for SS is fairly simple and based upon a centuries old financial practice: That of issuing 'bonds in perpetuity'.
To begin, the government would select a birth date that all those falling below must exit SS and all above have a choice to remain or exit. Let us take 55 years of age as an example. Those below 55 must exit and will receive bonds in perpetuity that have been valued to include the worker's past payments with interest. Additionally, he can now open one of the individual retirement plans available until he retires to add to his bonds. Those above age 55 will have the same choice to 'cash out ' or to remain within the system. Those who exit SS will now have a financial asset and those who remain will not. It is as simple as that!
Bonds in Perpetuity pay interest only, cannot be cashed in, can be sold in the secondary market by the holder, and become part of our federal debt. Even though a seemingly large federal debt and interest load is assumed at issuance, as the GDP grows over time these become comparatively smaller than the debt ratio of endless unfunded liabilities.
These bonds completely eliminate the specter of social security bankruptcy and provide the basis for a personalized retirement account. Experience with such financial management groups as TIAA, where the individual has a personalized retirement account for his life's work, the worker will be able to draw down 3-5 times per month versus that of Social Security and still have a remainder for family inheritance.
Poorer Workers Subsidize the Social Security of Richer Workers
Presently, excess Social Security funds are used to buy bonds from the government in order that the government is able to pay its bills, so those monies are not invested in the capital markets. Friedman's program of personal individual retirement accounts would add enormous funds to the markets, keeping interest rates low for both business and personal borrowers. That in turn, would continue to allow the American citizenry to maintain an extraordinary standard of living without interference from government bureaucracies and to provide immeasurably more personal freedom. It would also eliminate a present unacceptable and dirty little secret of Social Security, that since it has salary caps for payments into the system, the end result is that poorer workers subsidize the richer.
Economic Sophisms
The past sophistry used by politicians in order to amass political power by persuading the victims that they are being robbed for their own benefit finally seems to be failing as the populace begins to assess the true burden of government taxation, spending, and debt. It was estimated by Friedman that when one adds in federal, state, and local taxes along with the cost of regulation that in excess of fifty percent of the GDP is being taken by government officials to spend as they see fit. It has become a form of legal plunder as politicians continually ask for more, spend more, and borrow more.
The unique origins of American Exceptionalism do not support the present efforts to degrade the individual and put him under the care of the state. The false promises of Socialism to create a personal Utopia through wealth redistribution has never worked and its absurdity is foreboding of national ruin. This present path leading to the government becoming the main pensioner and medical provider, in turn, leads to the loss of personal and economic freedoms. It sounds much like the policies of those countries that we spent the 20
th century freeing with our blood and treasure.
Further, it is a shameful partisan and political act that has become a national disgrace to set up our progeny to live in a debt-laden country because we are unwilling to accept personal responsibility. Some day the children of these political charlatans will refer to their ancestors as the 'horse thieves' they are. Sadly, honesty and integrity seems to have deserted the present political class.
The Challenge I Make
It is our choice to repudiate these false promises of government care and to let the free market work as it always does by providing affordable products, including health insurance and retirement plans for all; or, to be a part of the offending generation that bankrupts the country through selfishness.
After over two decades of studying this problem, my challenge to the reader is to suggest a better framework than stated above. One that saves us from bankruptcy and chaos and that is a long-term solution rather than a short-term political fix: A solution that enhances the American experiment rather than causing our citizens to continue to suffer a humiliating loss of self-esteem through the present fostering of state dependency. I have not found one nor heard of one.
Freedom From Tyranny of Government Solutions
Lastly, Friedman's solution allows personal portability of both medical insurance and retirement saving plans. There would be no more discussion about not being able to leave an undesirable company because of loss of benefits. Everyone could work for whatever company they so desire for any length of time without eroding their financial future. Since one's personal freedom and his economic freedoms are inseparable, this solution gives the American worker what he so richly deserves: freedom from the tyranny of those who think they know better than he. The time for action is now!
WSJ article:
Friedman's 1980 PBS "Free to choose":
Bastiat Collection:
Milton Friedman Social Security Myth
The Black Book of Communism:
Hayek:
Richard Spencer was a Navigator in the 39th ATS, DAFB, 1962-1965,with about 2000 C-133 hours. Leaving active duty in Aug ‘65 I went directly to the University of Maryland and in 1969 earned a Ph.D. Richard was a Vice-President at a couple of local Colleges, had a small Mergers and Acquisition company and dabbled in Commercial Real Estate sales and development.
Richard can be reached at: samspencer@mchsi.com
