Abstract
This chapter and the two following chapters all deal with the legacy of Prince Bismarck, the inventor of the modern welfare state. In most modern states, this system takes up at least half of government revenue. It is usually a particularly pure redistribution with some people being taxed and other people receiving, and over a lifetime it doesn’t change people’s incomes all that much. Nevertheless, given its importance, devoting three chapters to it seems reasonable.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
I give the credit or blame to Prince Bismarck, but as a matter of fact, he was copying systems that had already been adopted by various private companies and labor unions in Germany. His objective pretty clearly was to win the next election, which, fortunately or unfortunately, he did not do.
They tended to live up near the top of the house, perhaps in a special room built in the attic. In those days it wasn’t realized that people with potential heart conditions shouldn’t climb stairs.
It should be kept in mind that a poor person in the United States, who is dependant on government support, normally has an income that is three or four times as high as the world average income. Our welfare system, like all other welfare systems, is heavily nationalist and ensures for our own citizens living standards that are well above the world average.
Paul Samuelson, “An Exact Consumption-Loan Model of Interest with or Without the Social Contrivance of Money,” The Scientific Papers of Paul Samuelson (Cambridge, MA: MIT Press, 1966) vol. 1, p. 219. I have made minor changes in his model, but they do not affect his general principles.
If we assume that their children pay part of the support of their parents (and of course they have a legal responsibility to do so if they have adequate income), then the model would be modified somewhat but not importantly.
Note that for simplicity I am assuming that people already retired begin receiving their pensions when a program is established. Most of the pension systems actually established did not have that feature. Only people who paid at least a little tax received pensions. My model is, however, simpler, and the point is of no practical importance.
There is here a certain problem since the amount available for expenditure is larger than current production. We can assume that the saving was done in real consumer goods or that a saving in funds was somehow matched that was kept out of use. In the real world, of course, investments are normally put into producer goods, and the switch to expenditure would mean a rapid running down of the capital stock of the country. This running down of the capital stock is, I believe, a real phenomenon, but the subject is discussed later. For the time being, I suggest that the reader assume that the saving was done in the form of current consumption goods.
Some scholars have suggested that the social security system could be terminated without loss to the current generation. See Peter J. Ferrara, Social Security: The Inherent Contradiction (Menlo Park, CA: Cato Institute, 1980). I doubt that these procedures will work.
Sherwin Rosen, “Some Arithmetics of Social Security,” unpublished, p. 3; Hal R. Varian, “Pensions and Public Policy,” unpublished, p. 1.
As a piece of technical economics, the failure of the poor to save in this case may or then again may not exert an externality on the middle class. It all depends on definition. I tried the problem of whether it was a genuine externality or not on a group of economists with special competence in this area, and the best answer that I got was, “that is the wrong question.”
There is considerable debate, economically, on whether there would be an interest rate in a stable situation like this. In my opinion, those who argue for such an interest rate are correct, and the others are not, but if the reader disagrees with me on this point, may I ask him to simply suspend his criticism until later. We are going to shift from our present stable society to a growing society shortly.
See Edgar K. Browning’s “Why the Social Security System Is Too Large in a Democracy,” Economic Inquiry 13 (September 1975): 373–388. Currently, the social security system is in severe financial trouble, and hence it is fairly certain to have either its payments or its tax schedule modified in some way. Under the circumstances there seems no point in presenting any detailed figures on the transfers involved.
See M. Darby, The Effects of Social Security on Income and the Capital Stock (Washington, DC: American Enterprise Institute for Public Policy Research, 1979); and R.J. Barro, The Impact of Social Security on Private Saving (Washington, DC: American Enterprise Institute for Public Policy Research, 1978).
Once again, I do not wish to argue that this is necessarily what would happen. The assumption will relax later.
In the real world, some people over sixty-five may not be permitted to join the program when it is first introduced.
See my article, “The Transitional Gains Trap,” Bell Journal of Economics 6 (Autumn 1975): 671–678.
I am seventy-four years old.
It should be said that the lobbying for old-age pensions is unusual in that the federal government actually subsidizes this lobbying to the extent of $73 million per year.
In fact, it was overindexed for a while, with the result that it looked as if eventually old people would be absorbing the entire national product. Congress has now partially corrected the error.
Once again, this does not mean not adequate to stay alive. Most of the population of the world stays alive on a good deal less than this amount.
Author information
Authors and Affiliations
Rights and permissions
Copyright information
© 1997 Springer Science+Business Media New York
About this chapter
Cite this chapter
Tullock, G. (1997). The Welfare State and Old-Age Pensions. In: Economics of Income Redistribution. Studies in Public Choice, vol 11. Springer, Dordrecht. https://doi.org/10.1007/978-94-011-5378-2_7
Download citation
DOI: https://doi.org/10.1007/978-94-011-5378-2_7
Publisher Name: Springer, Dordrecht
Print ISBN: 978-94-010-6261-9
Online ISBN: 978-94-011-5378-2
eBook Packages: Springer Book Archive