A ‘thought experiment’ about federal entitlement programs

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From P.J. O’Rourke and American Consequences:

In the interest of adding a little cogitation to the process of governance, let’s conduct a “thought experiment.” Let’s think about just one of the purposes that the federal government has been put to – providing entitlement handouts.

Let’s think about not doing that anymore.

The term “thought experiment” was coined 200 years ago by Danish scientist Hans Christian Ørsted, who discovered that electrical currents produce magnetic fields. You take a well-defined hypothetical and apply logic to discover what the outcome of that hypothesis would be. You ask, “What if?” Then you really wrap your head around the “if” part.

What if the U.S. federal government got out of the entitlement business? Why is it even in this business? Entitlement spending makes up 60% of the federal budget. The United States was not founded as a charity.

Where in the U.S. Constitution does it say that the purpose of the federal government is to take money from one group of people and give it to another group of people in order to make a third group of people feel good? (That third group being the kind-hearted folks who are always eager to help right society’s wrongs – with somebody else’s money.)

The economic upside to ending federal handouts is so obvious that even a bleeding-heart economist with a column in the New York Times would notice it. (I’m talking to you, Paul Krugman.)

We take that 60% of the budget, set 10% aside to lower the debt and deficit, and give ourselves a 50% tax cut. A 19.8% top tax bracket! This is almost as good as living in Hong Kong (top rate 15%) except without having a communist dictator with the world’s largest military force on our doorstep.

But what happens to people when the federal government stops giving them handouts?

First, let’s talk about what doesn’t happen. Some federal government entitlements are not handouts. Namely veterans’ benefits. Here is a useful purpose for government. When our fellow citizens put themselves at risk to protect us (and are paid rather poorly for doing so), we taxpayers should pick up the tab for their medical care, retirement, and whatever else we’ve promised them.

Also, Social Security and the part of Medicare that’s paid for by the Medicare trust fund aren’t really handouts. People spend their whole working lives paying into these schemes that the government has the nerve to call “insurance plans.” People rightly expect to get a return on their “involuntary investments.”

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We should get rid of Social Security and Medicare anyway.

But what will happen to the old folks? They’ll get rich.

Social Security and Medicare should have been privatized long ago. The libertarian think tank, Cato Institute, has been studying Social Security and retirement healthcare privatization for years. Google “Cato Institute” on the subjects to see a variety of well thought-out and practical ways that private wealth funds could replace the pitfalls of public funding (like this one).

In the meantime, let’s look at some figures from a liberal think tank, the Urban Institute. Its analysis of government retirement programs claims that a dual-income couple earning average wages and retiring in 2020 will typically receive $1,059,000 in lifetime Social Security and Medicare benefits.

Sounds pretty good – until you do the rest of the math. According to the Urban Institute that couple – each of them working from age 22 to age 67 – will have paid a total of $853,000 in Social Security and Medicare taxes.

A million-plus return on an $853,000 investment is swell – if it happened in yesterday’s day trade. But over 45 years?!

Averaging it out, the couple put almost $19,000 a year into their “involuntary investments.” Let’s say the two of them have no financial savvy at all. Let’s say they put their annual $19,000 into an ordinary savings account that since 1975 has paid on average 3.5% a year in interest. (The Urban Institute couple are a very average pair.)

The couple would be more than twice as rich!

As it is, they only get their million dollars if they live long enough and get sick enough to qualify for all their entitlements. What happens if they get struck by a meteor the day after they retire? Nothing. It’s the government’s money. Their $1,059,000 goes to some other old, sick couple.

If our Urban Institute couple had $2 million of their own, they could make a will and leave it to…

NOT to the federal government. They could leave it to an organization that was founded as a charity.

And charity will be needed if we stop federal government entitlement handouts.

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We can privatize our way out of Social Security and Medicare and eliminate approximately $1.5 trillion a year in federal entitlement spending. But that still leaves us with the nearly $1 trillion in Medicaid and other welfare entitlements.

Which brings us to the most important part of this thought experiment.

What kind of a nation are we? If the federal government got out of the entitlement business, would we make it our business to feed the hungry, treat the sick, comfort the distressed, and help the helpless?

I hope to hell we would!

We might do it through state, city, town, and county programs that replace some of the federal entitlements. Surely local people know what the needy in their communities need better than Washington does.

But mostly we would perform real acts of charitableness with real charity. (Memo to those kind-hearted folks who are always eager to help right society’s wrongs: Giving somebody else’s money to somebody else is not charity.)

Americans already make more charitable donations than anyone else on earth. And the Gallup Poll “World Giving Index” says we are outranked in the percentage of what we give only by humble Myanmar. Good for you, people of what used to be called Burma!

The National Philanthropic Trust, a nonprofit that keeps track of these things, says that in 2015 individual Americans donated $373.3 billion to charity. Corporations gave $18.5 billion. And private charitable foundations contributed $57.2 billion.

That’s a total of $449 billion. In our thought experiment, we’re already halfway to meeting the needs that the remaining federal government entitlement programs were supposed to address.

And this is assuming that there’s no waste, fraud, and abuse in the $1 trillion federal poverty entitlement programs. (In which case, we’d have to work with a hypothesis that clearly isn’t true.)

But we can do better than $449 billion in charitable giving. We’ve just gotten a 50% tax cut. We have some extra cash. The average household contribution to charity is currently $2,974.

Let’s double it. Let’s triple it. However, not until we’ve spent some time pondering the fundamental purposes of the federal government.

As I said, it’s just a thought experiment. But I like what I see in the test tube.


P.J. O’Rourke
Editor in Chief, American Consequences


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