Welfare: Not Fair and Not Well

The welfare state doesn't pay any more – not in France, Hungary or the US...

"YOU CAN TAKE your loans and shove them," the Hungarian economic minister, György Matolcsy, did not say – but that's what he was thinking, writes Bill Bonner in his Daily Reckoning.

Watch out. The Hungarians are trendsetters. They ran a budget deficit of 9% of GDP back in 2006. They got a $20 billion bailout in 2008 and have been living with austerity measures ever since. The current budget is only in deficit by 3.8% of GDP – barely a third of the US level.

After a regime change in April, they've had enough. "We told the IMF/EU that further austerity was out of the question," said Matolcsy.

Les Echos reported last week that 64% of French workers were retired by age 60. People working for favored state enterprises – such as the SNCF, which runs the train system...or for the "fonction publique," which keeps people from getting anywhere – may retire earlier. They get extra credit for years worked in hardship overseas destinations – such as Tahiti, for example. And a French politician can get a pension after only 6 years in government.

In the old days it was a lucky man who retired before his beard grows white. Now, if he plays his cards right, he could begin collecting a pension before his beard starts to grow at all.

This information comes in the context of a great debate, "a parliamentary battle". The French government has proposed a law raising the retirement age to 62. The socialists have proposed 150 amendments. Over at the Financial Times, meanwhile, the editors have devoted this week to their own great debate on the subject. "To tighten, or not to tighten – that is the question," writes Martin Wolf.

The rumbles in Paris and London are just two of many mock skirmishes going on. Neither side wants to aim too carefully at the real problem; they fear they might hit themselves!

You'll recall, the G20 – the USA dissenting – urged member states to cut public expenses. They pledged to cut public deficits in half by 2013 and to stabilize debt by 2016. But Hungary has already broken ranks.

The big spenders insist that more spending is needed to protect the system. The cutters say more cuts are the thing that will preserve it. Neither has any doubt that the system is worth saving. That, precisely, is the target of today's back page artillery.

Otto von Bismarck would hardly believe what a smashing success his innovation has become. Practically every advanced government picked it up in one form or other. The little guy liked it because he thought it gave him something for nothing. And the welfare state proved him right. The expenses of the first generations in the system were easily supported by the larger, richer generations that came after. Leaders liked it too, because it made the voters more dependent and controllable: the masses wouldn't revolt as long as their pension checks kept coming.

Ernest Ackerman must have smiled broadly when he got the first US Social Security check for 17 cents in 1937. Since then, the checks got bigger and came earlier. More benefits were added – education, health care, parks, libraries, unemployment compensation... Ordinary people began to spend more time in universities than they did in bars. Health care services included evermore complicated and expensive procedures. Thousands were employed to regulate, control, protect and administer the public weal. Millions more were able to malinger and leech. One got a subsidy for his farm. Another was 'disabled' at work. And still another had his bank bailed out.

The first problem is obvious; the costs got out of hand. The United States has one of the least extensive social welfare systems. (It makes up for it with military spending.) Yet, its basic figures are not much different from those of most European states. The US has a current deficit equal to about 12% of GDP and has debt approaching 100% of GDP. If you include state and local debt, as well as the under-funded liabilities of its pension and health care plans, the total rises to more than 500%. In other words, future generations will have to devote 5 years' worth of total US output in order to pay for benefits awarded by a previous generation of politicians.

Over time, too, the 'benefits' tend to become more and more bogus. Providers and recipients connive in a kind of symbiotic zombie-ism. Perpetual students take pathetic and preposterous classes from permanent professors. Morbid patients, funded by the state, become the health care industry's best customers. And early retirees clog the highways with their camping cars, when they should be at work. Chiselers, grifters, stuffed-shirts and time-wasters – the welfare state attracts them like a rich old widow attracts gigolos.

The masses are beginning to see this as a losing proposition; the swindle no longer works in their favor. New generations are often smaller. They may not be richer either. Staggered by debt and deadbeats, the next generation will have a hard enough time taking care of itself, let alone paying the accumulated expenses of the ones that came before.

Today, a taxpayer pays a Euro to his government. With all the waste and corruption, he's lucky if he gets 50 centimes' worth of real services. Officials try to disguise these facts by borrowing, hiding the 'social charges', and printing money. But word gets around: the welfare state no longer pays.

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Bill Bonner is founder and owner of Agora Inc., one of America's largest consumer newsletter publishers. Best-selling author and globe-trotting correspondent since 1999 for the Daily Reckoning email, he is chairman of family-wealth advisory Bonner & Partners, and co-author with his son Will of Family Fortunes: How to Build Family Wealth and Hold Onto It for 100 Years (Wiley, 2012).

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