Pros And Cons Of The Welfare State System

Burts 1
Western governments are approaching a crossroads. The current Welfare State system has proven to be unsustainable. Of the twenty countries with the highest amount of external debt, eighteen of them are Western nations; if you measure debt on a per capita basis, this number increases to nineteen. Yet governments continue to promise more benefits to citizens and citizens are growing ever more accustomed to receiving benefits from the governments. On top of this, the current “pay-as-you-go” system of the working paying for the pensions of the retired proves to be increasingly unstable as birth rates drop and life expectancies improve. In general, government intervention into markets creates inefficiencies. The lack of competition in areas
either completely or significantly controlled by the government leads to higher prices, less output, and a lack of incentive within the sector to solve these problems. In the United States, social security and medicare are predicted to go bankrupt in 2033 and 2030, respectively. At the crossroads between the cultural belief that the elderly, poor, and drastically sick should have a safety net and the fiscal reality that the system is utterly broken, what will the next chapter of the welfare state saga hold in store?
In premodern human society, social welfare was provided by the family unit. In agrarian dominated economies, the old in the family would exchange capital in the form of experience and possessions for assurance of the young looking after their well being. However, as society transitioned to a predominantly urban civilization, the family unit gradually fell apart. With this change came the beginning of conversations about the creation of government run old-age insurance. This new idea was given first life by German Chancellor Otto von Bismarck in 1889. The compulsory program, financed by a coalescence of employees, employer, and government, provided those beginning at the age of seventy with retirement benefits, as well as other benefits for persons with disabilities.
By 1935, nineteen European countries had followed Germany’s lead and instituted compulsory old-age insurance programs of their own. And across the Atlantic, America’s relatively late transition from an urban to an industrial economy had early proponents calling for a similar program on the grounds of the elderly forfeiting their traditional role in the family and the marketplace. On the heels of the vicious, raw capitalism of the late 19th Century which had made men, such as John D. Rockefeller and Andrew Carnegie, among the richest men to ever have lived and had thrust America into a position of global economic dominance, the first attempts at old-age insurance came from the private sector. However, the market failed to provide adequate coverage and some began to argue that the cause was lost altogether. Spencer Baldwin, the Secretary of the Massachusetts’ Commission of Old Age Pensions stated,
It is evident that some comprehensive plan of old age insurance or pensions must be adopted in this country, at some time in the near future. The inadequacy of private enterprise, cooperative insurance, and corporation plans is generally admitted. (Baldwin, 1913)
The only notable precursor to compulsory old-age insurance in the United States was Civil War Pensions paid to Union veterans and their surviving families. In fact, in 1983, the most expensive year for Civil War pension payouts, benefits accounted for 41.5% of federal expenditures (It is worth noting that total federal expenditures in 1893 were approximately $12.6 billion, making the cost of benefits around $5.23 billion. While last year, although social security is about 28% of federal expenditures, that amounts to $981 billion out of the $3.5 trillion in the budget.). The Civil War pensions were very similar to modern social security, paying retirement, disability, and survivors benefits. However, there was one key difference: the number of people being paid these benefits quickly dissipated.
When the Great Depression struck The United States following the stock market crash of late October, 1929, everyone suffered.
But few if any suffered more than the elderly. As they were often to be laid off and the last to be retired, poverty amongst seniors rose to above 50%, compared to 10% today. The nation was crying out for a solution to this catastrophe, and one man struck that chord harder than any other. In 1933, a 66-year-old unemployed physician named Francis E. Townsend published a proposal for old-age insurance in his local Long Beach, California newspaper. Designated as The Townsend Plan, the plan quickly became popular and the next year was published as a pamphlet and distributed throughout the U.S.. A few years later were 7,000 Townsend clubs advocating the plan with a reported membership of over 2.2 million, about 2% of the countries population. The proposition called for for a universal pension of $200 per month for those of the age of 60 or above funded by a 2% national sales tax. Although The Townsend Plan counted President Roosevelt as an ally, the president saw the plan as unrealistic and impractical. In fact, contrary to popular belief, there is great evidence that FDR was in a way forced to introduce the Social Security Act, in order to nip the growing support the The Townsend Plan in the bud. Frances Perkins, Roosevelt's Secretary of Labor, revealed this quote from the president in his 1946 memoir The Roosevelt I
knew:
We have to have [The Social Security Act]. The Congress can't stand the pressure of the Townsend Plan unless we have a real old-age insurance system…" (Perkins 1946, 294) On April 14, 1935, President Franklin Delano Roosevelt signed into law the Social Security Act. The Great Depression had provided the catalyst necessary to convert the concern over economic security of the industrial age in America into public policy. The program was originally conceived to be financed by those working by paying into the “Old-Age Reserve Account” through payroll taxes of 2%, split evenly by employer and employee (renamed the Social Security Trust Fund in 1939). This fund would then be available to retirees beginning at the age of 65. The use of a payroll tax would tie all wage earners into the system, in effect making it compulsory while also adding a psychological benefit of making people feel like they were providing directly for their own retirement, instead of receiving a handout. Though the Social Security Act of 1935 did a great amount for the retired and unemployed, the program did not effectively provide for the sick and disabled.
Instead, the American medical insurance industry grew out of a relationship between employers and employees. Between 1939 and 1945, the percentage of the American population covered by employer-based health insurance plans rose from 8% to 25%. To further fuel to growing fire, in 1943 the IRS declared that group insurance purchased by employers on behalf of employees does not qualify as a taxable expenditure. By 1965, approximately 80% of the population had medical insurance through their employer. These advances led the proponents of nationalized health care in the 1950s and 60s to shift their focus to the uninsured, and since the retired could not receive insurance through their non-existent employers, these focuses shifted in particular to the elderly. By the beginning of the sixties, several bills were competing to become the first forerunner to Medicare. The winner came in a bill passed in September 1960 sponsored by senator Robert Kerr (D-Oklahoma) and representative Wilbur Mills (D-Arkansas). This bill bestowed states with federal grants to partially subsidize the medical costs of the elderly. The momentum picked up when John F. Kennedy, a progressive who was an open supporter of health care being included in the Social Security system, was elected and then inaugurated on January 20th, 1961. In the face of strong
support from democrats, and with the death of Robert Kerr in 1963, Wilbur Mills became the main opposition within his party to amending Social Security to include medical care. MIlls’ concerns can be condensed in the following excerpt from a luncheon meeting on September 28, 1964.
The central fact which must be faced on a proposal to provide a form of service benefit - as contrasted to a cash benefit- is that is is very difficult to accurately estimate the cost. These difficult-to-predict future costs, when such a program is part of the social security program, could well have highly dangerous ramifications on the cash benefits portion of the social security system. (Rettenmaier, 2000)
However, in the end Mills could not fight the rising tide and wrote a bill compromising a bill proposed by the Johnson Administration and a bill proposed by conservative representative John W. Byrnes (R-Wisconsin), who once aptly stated:
Under the payroll tax erroneous concept has been sold to the people that they have paid for their benefits, that they have bought something as a matter of right, under such a concept there is no flexibility to make changes because the people will tell you, ‘We have bought this, and you cannot make any change except to liberalize it. (Derthick, 1979)
So on July 30th, 1965, President Lyndon B. Johnson signed an amendment to the Social Security act headed up by Mills into law. “Medicare” would cover 80% of physician fees and include supplemental insurance with a $50 deductible and a $6 monthly premium, of which $3 would be paid by general federal revenues. The program is divided into four parts: Part A - hospitalization coverage; Part B - medical insurance; Part C - privately purchased supplemental insurance; Part D - prescription drug coverage. Funding for Part A came from an additional payroll tax of 0.7%, split evenly between employers and employees (raised by congress to current level of 2.9% in 1986 in an effort to keep pace with rapidly expanding costs). Part B and Part D funding would come primarily from general federal funds, coupled with premiums from the beneficiaries. Part C was not separately financed, but instead retirees could choose from a government sanctioned private entity which provided equivocal or surpassing coverage which would include Part A, Part B, and Part C and pay an additional premium. The Social Security Amendments of 1965 also created Medicaid, a program which was at its onset optional for states; all states have chosen to participate. Federal funds were to pay for up to half of the cost of Medicaid in each state, with the rest picked up by state funds (the maximum amount paid by the federal government has since risen to 82%). The program aims to assist low income individuals and families with the costs of medical care. But unlike Medicare, Medicaid has strict qualification standards. In addition to the minimal federal restriction on eligibility, each state can set its own standards on top. Since every state runs at least in part its own program, for are fifty different medicare programs, one for every state.