Magic Accounting
From the May 14, 2012, issue of NR.


The “infantile denial” expressed by the woman who wrote to President Obama is nothing more than the demand for “the honest fulfillment of a contract between the citizen and the state.” Having discharged her contractual duties as the people who wrote the contract explained them, she resents the possibility that the government might, to her detriment, unilaterally revise its contractual obligations. Appelbaum and Gebeloff summarize the attitude of the Medicare recipients they interviewed: “They paid what they were told; they want to collect what they were promised.”

But the fulfillment of our social-insurance contracts has become a grave problem because the myth of social insurance cannot be reconciled with the reality, political and fiscal, of social welfare. The Times cites an Urban Institute study showing that the value of social-insurance benefits is typically a multiple of the value of social-insurance taxes. In one example, a woman born in 1965 earns a midrange salary during her working years and deposits her (and her employers’) Medicare withholding taxes into an account that compounds annually at the inflation rate plus 2 percent interest. That account would be worth $87,000 by the time she retired in 2030 at age 65. “But on average,” Appelbaum and Gebeloff report, “the government will then spend $275,000 on her medical care.”

Our welfare state is a system at war with itself. It offers us, in our capacity as beneficiaries of its programs, a terrific deal. Not only do we receive the material benefit of enormous windfalls on our “investments,” ones that entail no participation in any kind of capital formation and, therefore, never expose us to any risk of capital destruction. We also receive the moral benefit of strenuous reassurances, delivered over many decades, that our windfalls are not really windfalls because we’re merely getting back what we’ve paid for. And so we have no reason to think of ourselves as recipients of charity or dependents on welfare. We’re entitled to every last dollar of our benefits. They come to us as a matter of right.

What the welfare state offers us in our capacity as taxpayers supporting its programs, however, is a terrible deal. We are the ones who’ll have to cover the difference — $188,000 in the Urban Institute’s example — between what each American actually did pay in social-insurance taxes and the much larger amount he’s been told again and again he’s entitled to get “back.”

In the eight decades since the dawn of the New Deal, liberal politicians and intellectuals have tirelessly urged their countrymen to disregard all the evidence and common sense telling them to worry about this fiscal disparity. The most notorious example was the prediction of the economist Paul Samuelson in 1967 that our social-insurance programs could go on and on, paying each beneficiary far more than he had ever contributed, because of our “growing population” with “more youths than old folks,” and because “the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see.”

Twenty-nine years later, altered economic and demographic prospects found even Paul Krugman conceding that Social Security was built to look like “an ordinary retirement plan,” where “what you get out depends on what you put in.” It has, in reality, “turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in.” The trends Samuelson thought eternal having proven transient, “the Ponzi game will soon be over.”

More recently, liberals have encouraged the belief that the high costs of Obamacare, the most dramatic expansion of the welfare state since the Great Society, will be offset by that law’s mechanisms for incorporating remarkable new efficiencies into our health-care system. Newly constituted groups of experts, in bodies including the Independent Payment Advisory Board and the Center for Medicare and Medicaid Innovation, will, we are assured, discover ways to significantly reduce the long-term growth rate of health-care spending and preserve or enhance the quality of health care while never even considering any recommendation to “ration health care, increase Medicare premiums or cost-sharing, cut Medicare benefits, or restrict eligibility.”

One might reasonably suppose that if our federal health programs, the most important of which are nearly 50 years old, do indeed offer billions of dollars in potential savings that won’t have the slightest adverse impact on the quality of the health care we receive, this low-hanging fruit would have been harvested by now. Not only has it not been picked, however — it can’t even be named. Obamacare’s defenders exhort us to place the highest hopes in the discovery, just over the horizon, of marvelous new health-care efficiencies, but decline to provide examples of these painless improvements.