Tuesday, June 21, 2016

What if Welfare Stopped?

Sean asked a fascinating question on How to Help Kids Escape Poverty that deserves it's own post.

"Stockholders of many retail companies, for instance, benefit significantly from the fact that the government picks up the slack for their failure to pay a living wage to many of its front line employees." Sean

"Also, the reality is that neither the consumers nor the businesses receive any benefit from the government, only the employees do. It is like we are rewarding them for squandering the free education that we gave them at a significant cost to the tax payers. "Oh... You barely got that HS degree or you dropped out... Don't worry... We will charge society even more to make sure you are paid well to sit at that music or vaping store..." ." G2A
"If we ended welfare today, would the social costs disappear or would they just be shifted?" Sean
I had to fix a slight error in my quote, I changed "customers" to "businesses".  Now back to Sean's brilliant question...  What would happen if the government stopped spending even half of that $1 Trillion per year that we currently are?  (that leaves $500 Billion per year to care for the truly disabled and elderly)
  1. I assume wages would stay the same or go down some, since I believe there are quite a few healthy capable potential workers who will have to enter the market to get money.
  2. I assume charitable giving would increase as people saw an increased need.
  3. I assume people would be more careful to ensure they did not get pregnant, since the burden would fall more fully on them.
  4. Rents in some areas may fall since the subsidies would not be available.
  5. Some tent cities may be set up, crime/prostitution may increase somewhat, etc.
What do you think would happen?

52 comments:

Anonymous said...

I assume wages would stay the same or go down some, since I believe there are quite a few healthy capable potential workers who will have to enter the market to get money.

Are you assuming that wages are set by supply and demand? Does that really happen in the real world? The fact is, I don't often see jobs routinely sold on markets. None seem available on eBay. Where I used to work, promotions weren't for sale. Wages weren't set through any sort of bidding process, rather they were set by a consulting firm, which I can tell you, was utterly lacking in the transparency necessary to the successful operation of free markets.

--Hiram

Sean said...

To know the consequences, you have to say specifically what would be cut. Cutting Medicaid vs. TANF vs. unemployment vs. Social Security Disability makes a huge difference.

John said...

I said we would continue to care for the old and disabled. That means the cuts would be every where else.

I mean the question was regarding the elimination of welfare. Which I consider as payments to those who are physically and mentally capable of working?

You asked the question. What did you envision?

Laurie said...

Policy Basics: Where Do Our Federal Tax Dollars Go?

"About 10 percent of the federal budget in 2015, or $362 billion, supported programs that provide aid (other than health insurance or Social Security benefits) to individuals and families facing hardship. "

this sounds like a lot of money to me. Cutting the federal budget by 10% seems like it would contribute to a recession. (My expertise in making this predication comes from taking a macroeconomics class 30 years ago and reading blogs which sometimes discuss economics.)

John said...

I think the answer is "it depends". One has to remember that government only spends money that it has taken out of the economy.

If citizens got to keep that $362+ billion it is likely they would spend or give away much of it. If your taxes dropped by 10%, what would you do with that windfall?

Laurie said...

I would pay more for college for my kid so he would go less in debt. I think this would have a tiny negative impact on the economy as overall less money would be spent as the welfare recipients wouldn't be spending the $ and our spending would be the same.

John said...

I agree with you that certain parts of the economy would slow, but other portions would grow.

Sean said...

"If citizens got to keep that $362+ billion it is likely they would spend or give away much of it. "

The entire $362 billion gets spent today. Any of it that didn't get spent would be a drag on the economy.

Not to mention the pain it would cause it in the lives of real people and children. You'd be reducing overall demand in the economy, and then expecting people to get jobs in that environment. Of course, many of those same people would lose the assistance to help them get child care that enables them to hold down jobs, so maybe that would even out somehow. People would die, whether through loss of food support or loss of health care (which would be included in your broader "payments to those who are physically and mentally capable of working" definition. Some might freeze to death during the winter because their heating bills wouldn't be subsidized anymore. It would be a totally self-inflicted disaster.

jerrye92002 said...

We are mixing in at least two things and that's complicating analysis. Speaking just of "cutting off welfare" we actually have an example. Wisconsin implemented a work requirement, and 20% of people promptly left the welfare roles rather than seek work or job training. It seems reasonable to assume they didn't need it. Time limits in the '96 welfare reform act moved, according to some sources, about 50% off of welfare and into work before the benefits were "cut off." So, we cannot cut all of it off immediately, and we cannot cut it all off gradually, either. My personal guess is that about 20% of able-bodied welfare recipients are so deep in multi-generational poverty, hopelessness and the entitlement mentality that they are essentially unemployable. I'm thinking that is where the harsh "cut off" needs to apply. That is, we found a job for you, and at the end of the day if your work was satisfactory, you get your check. Or we'll help find you one you like better, but it's one day a week, to start. Then...

Now the complication is how this impacts government revenue and spending. Right now, if we can save $362 billion/year, we go a fair ways towards balancing the budget. That frees up capital which can be used to expand the economy and grow jobs; all good things. We can't get a tax cut because we're still overspending, but all of these new workers will be paying something in taxes rather than consuming tax dollars, so that is also a positive. Total demand in the economy stays the same or increases, since everybody has to eat, while productivity goes up because you have fewer people not producing anything. I see nothing but positive, if it's done well. Of course, it's a government program, so...

John said...

You must think very poorly of the citizens of the USA. All this talk of starvation and freezing to death.

First, the poor can change their purchasing choices. They can put more people in an apartment or they can go live with their parents or children. Which may also solve the childcare issue.

Second, do you really believe that Americans are so greedy that the charities would not become better funded.

Sean said...

"Second, do you really believe that Americans are so greedy that the charities would not become better funded."

The reason these programs exist is because private charity wasn't able to meet the demand. Why would that be different today?

John said...

I am not sure if that is why these programs exist. They may exist because the Politicians saw them as a good way to encourage people to vote for them. Imagine the sales pitch...

"Are you tired of not having enough money and/or seeing beggars in the streets? Vote for me and I will forcefully take money from other people through higher taxes on the wealthy, and distribute it to the unfortunate."

And maybe the first time it was really needed. However the politicians saw that it worked well so they doubled down on promising wealth redistribution again and again. Then after awhile the negative stigma of being on the dole went away and people got hooked. And then they had more kids who they indoctrinated to believe that they were owed these handouts...

On top of this the local, state and federal administrators started to grow their kingdoms and start new ones. I mean one needs more employees, customers, funding, etc if they want to get promoted.

Sean said...

You really should go back and read your history books instead of Ayn Rand and other right-wing paranoia fiction.

John said...

No Ayn required.

History of Entitlement Spending

Wiki Social programs in America

RCP History of SS

USN The Shocking Truth

Forbes Before Entitlement

History of Welfare

John said...

WP The Lost War on Poverty

jerrye92002 said...

"The reason these programs exist is because private charity wasn't able to meet the demand." I keep hearing this old canard, with no evidence ever presented for it. It seems like a clear supply and demand situation-- when government demand for poor people drives up the price government is willing to pay, the supply of poor people goes up with it. In the Wisconsin example, 20% of recipients didn't need it, and if 25% of taxes now going towards "the poor," were instead left in the hands of individuals, how much more charitable could they be? And since private charity is vastly more effective and efficient, I believe we would all be better off. Of course, it can't be done cold turkey, but never say it can't be done at all.

John said...

After conducting the little research project that Sean assigned me, I find it interesting that it seems that this whole chain of events was triggered by the Great Depression. The special supports that should have been temporary for that severe economic downturn somehow turned permanent.

Then came social security that FDR supported, then came an expansion that he was against, and on and on and on.

I mean the frog probably never even felt the temp getting warmer... And now what a mess. CNN Money SS Report

Trustee Report Summary

Sean said...

Social Security isn't a mess. It's relatively easy to fix, it just requires political will. (And it has been an incredibly effective program that is more vital than ever with the destruction of defined benefit retirement programs in the private sector).

John said...

"relatively easy to fix"

Which one is that?

Raise the premium payments (ie payroll tax) on some citizens without increasing their benefit? :-)

Laurie said...

the name of the program - Social Security sort of implies that it is a bit of a socialist program. It is not called individual retirement account. If I live to be 100 or more my retirement savings will be long gone but my ss check will still arrive in my bank account each month. If I die next year my 35 years of contributions will have helped to support seniors like my parents.

It's funny how nothing animates you more than complaining about wealth redistribution and nearly every topic can be tied back to this somehow. Didn't your kindergarten teacher teach you how to share?

Laurie said...

A Guaranteed Income for Every American

Not sure if I posted this before. I didn't read this before I linked it as I am going to bed. I think we will eventually have UBI in th USA.

John said...

share: "to let someone else have or use a part of (something that belongs to you)"

I am big on sharing. That is why I support charitable giving.

Government mandated wealth distribution is not sharing. It is not even dividing wealth into fair shares based on effort, investment or contribution to our society. Otherwise the poor free loaders who failed to make good in our free schools would get nothing.

And yet you are back with the concept that everyone deserves a piece of the American Pie, even if they sit on their butt or worse yet disrupt our schools/society. I will never understand.

If you hired someone to mow your lawn and they never got around to it... Would you still pay them? I mean do you just owe it to them because they are a living human being? Or do they actually need to perform to earn the money?

Why again do you think that people who fail in our schools and create more kids/other costs than they provide our society deserve a "slice"?

I am happy to offer them training or work that enables them to earn cash/food. But just giving them cash, food, healthcare for nothing definitely promotes poor behaviors.

Sean said...

"Raise the premium payments (ie payroll tax) on some citizens without increasing their benefit? :-)"

Reality dictates that the wealthy are going to take some sort of haircut on Social Security -- whether it's increasing their tax without increasing their benefit or cutting their benefit while keeping the tax the same.

jerrye92002 said...

Sean, I disagree. Yes, if Social Security continues as is it will eventually go broke and nobody gets anything. It's not "security" and if you raise those taxes high enough to keep even, you drag down the economy and SS still goes broke. Raise taxes just on "the rich" without increasing benefits and you put the Big Lie to the idea that Social Security is any kind of retirement savings vehicle that you "invest" in.

Laurie, the SSA used to send out, every year, a "statement" of how much money was in "your account." They quit doing that when enough people pointed out that there was actually ZERO money in your account and all they were showing you was how much you had paid in taxes each year, plus what SS was /promising/ to pay at your normal retirement date.

Face it, SS has long outlived its usefulness and its promise, and soon its funding. It's simply a regressive tax scheme that truly benefits relatively few individuals. The surest way to "fix it" is to phase it out over the next 30-40 years in favor of private accounts. Make the savings mandatory if you want, and those who must retire early (eliminate mandatory retirement, it's an artifact of the Depression) can qualify for a real welfare program. Everybody else is likely to be far wealthier and our economy will be stronger as a result.

Sean said...

"Yes, if Social Security continues as is it will eventually go broke and nobody gets anything."

No, that's not true. If you do nothing, when the trust fund hits 0, the taxes collected will still be enough to pay about 75% of the projected benefit payments.

John said...

Jerry,
Sean's correct the benefits will just drop to match whatever is being paid in at the time. No more trust funds with balances in them.

Sean,
Remember that I recommend that SS and Medicare be rolled into Welfare and Medicaid. Then only the poor would receive government payments. Of course it may be hard to get every citizen to pay their payroll taxes each month.

Sean said...

"Remember that I recommend that SS and Medicare be rolled into Welfare and Medicaid. "

That would be an ever larger impact on wealthy folks than what I propose. Good luck!

John said...

But at least we would be honest. The problem with the current story line is:

- people think they have paid in premiums therefore they are entitled to benefits based on that pay in amount.
- therefore the recipients think they are not accepting government welfare / insurance programs that they really are.
- therefore everyone is fine with continuing to pay in to the programs.

The Liberals want to propagate these beliefs while increasing the premiums & decreasing the benefits for some of the people in the pool. Therefore making the programs even more significant wealth transfer tools.

John said...

Personally I think most people like myself would happily opt out of SS/Medicare if we got to stop paying pay roll taxes. Or if they were reduced significantly because only the destitute received aid...

Of course this becomes a terrible disincentive to saving and investing for many. Why squirrel away a nest egg if others who spent their whole life "over spending" will get checks and you won't...

So I am for keeping the system the way it is and increasing the payroll tax rate (premium) on all of us. Or cutting the payout (benefit) for all of us.

This is supposed to be a way to pool money to provide insurance and a pension. It is not supposed to be a way to rob the rich to give to the poor.

jerrye92002 said...

Sean is right. Again. But a system that only pays out 75% of what was promised is not a very good system, and the projections are that it will only get worse as fewer and fewer workers try to support more and more retirees. The "Trust Fund" is an illusion. It's simply an accounting gimmick to transfer General Fund money to SS recipients, and it is already starting since SS income is below outgo. The trust fund balance is 0 right now, since it consists only of "government IOUs."

The only way this gets better is by moving gradually away from this system to (mandatory, if you insist) private retirement accounts. It can be done, the math works, and everybody is better off at retirement time. All you need do is add seniors who can no longer work, and who didn't work enough to pay for a retirement, to the welfare rolls.

John said...

"The trust fund balance is 0 right now, since it consists only of "government IOUs."

You are so goofy when you say that... Don't you think an investment in US Treasury Bonds is a safe investment and very real?

Secondly FICA IS NOT a retirement account... It is a multi-facetted INSURANCE program... Some people get very large pay outs and some people get little or nothing... Just like term life insurance, car insurance, long term care insurance, etc, etc, etc.

Why do people like to compare it to a retirement account???

John said...

I think you should read the CNN Summary.

The good news is that the pay outs start increasing after a bit... That is after the Baby Boomers who did not put enough in to fully fund the system start to die off... Now isn't that ironic...

jerrye92002 said...

FICA has been continually sold as a "retirement savings account," not "insurance" though it does resemble insurance more than an investment in that you may collect nothing, but even with insurance, your family usually collects after you die. It's a terrible investment and not much of an insurance program.

And no, the Trust Fund is NOT "an investment in US Treasury Bonds" because those bonds are not a liquid asset-- the government promises to pay itself (an IOU). It could cancel that obligation by simply ignoring it, just like they can cut SS benefits at any time. Were these bonds "real" the solution to the trust fund shortfall would be easily solved. Congress could simply increase the statutory interest rate from the current 3% (I think) to 90% and double the amount in the fund. Of course, every bond redeemed from the trust fund to pay benefits must come out of the General Fund. The "trust fund" is just a "middle man" operation for spending tax dollars directly on SS benefits.

And yes, the whole idea of transitioning to private accounts is based on the knowledge that those currently receiving benefits will gradually die off and the system will become largely private (and solvent).

John said...

You are correct, it does not include life insurance. Only disability, health insurance, some survivor benefits, long term care, etc.

John said...

The trust fund is its own legal entity whether you want to accept that or not.

The US govt owes it money just like it owes all of us bond holders...

jerrye92002 said...

The US Gov't "owes it money." OK, then why can't the SSA turn around and sell those bonds on the open market, to "us bond holders" and get a higher return than what is authorized by Congress? And again, there is no money there, only a promise to pay. It is not an "asset" because it cannot be converted to cash unless Congress takes money from the General fund to redeem those bonds, whereas if YOU held the bond, you could sell it to another investor anytime you chose. It is why some plans to privatize SS include distribution of those bonds to current and/or future retirees on a pro-rata basis. The money to pay SS benefits continues to come out of the General Fund, but the Trust Fund "middle man" is eliminated.

jerrye92002 said...

"Personally I think most people like myself would happily opt out of SS/Medicare if we got to stop paying pay roll taxes. Or if they were reduced significantly because only the destitute received aid..."

So why do you continue to make "most people" unhappy? If welfare "stopped" as you propose (that is, reformed to its essential function of helping citizens to gain productivity and wealth), then SS reform would be all to the good, and what remained of the welfare system would take care of those who hadn't saved enough (even though savings was mandatory) to secure retirement and they were at the point they couldn't work any more (remember, part of this reform is that mandatory retirement goes away).

John said...

All pensions have a trustee who manages the investment and disbursement of funds... The only difference is that these folks can only invest in one place. That being the safest investment possible...

For better or worse like all insurance plans... It works best when it has a large diverse population of paying customers that the actuaries can analyze. And they need people like myself who pay the max or near the max each year to make up for those who do not... Like my Mrs...

John said...

The unfortunate reality is that most Americans will not save enough for their pension, long term care, potential disability, healthcare... Therefore forced insurance premiums make sense.

Anonymous said...

The unfortunate reality is that most Americans will not save enough for their pension, long term care, potential disability, healthcare...

I agree. And bear in mind that the trend is not in our favor as health care becomes more expensive, and pensions go away.

--Hiram

jerrye92002 said...

"The unfortunate reality is that most Americans will not save enough for their pension..."

That's why you make this new private Social Security system mandatory, just like SS is. Then you only have to provide "enough" from the taxpayers to cover those who did not save enough, even WITH mandatory wage confiscation, to live on. But since the mandatory retirement is eliminated, some people can keep on working and retire when they want and can "afford" it. And why not, we've already raised the mandatory retirement age by two years, and those wanting to "save Social Security" (I see no reason why), are talking about raising it some more, while others still retire early but get "penalized" for it.

jerrye92002 said...

Medicare should also be optional, with a "welfare component" for those who can no longer work and haven't saved enough to retire.

Anonymous said...

Medicare should also be optional, with a "welfare component" for those who can no longer work and haven't saved enough to retire.

Will making Medicare optional reduce the amount we spend on health care? Both or either for the elderly and the population generally?

--Hiram

jerrye92002 said...

Absolutely.

John said...

I don't see SS and Medicare changing much since no one is willing to send old foolish spend thrift people to go freeze to death in the wild...

And no one is punishing people for retiring early... If you retire early the principal will not have grown fully, and you will need to draw on it for a longer period. Therefore the monthly payment is less. It is not punishment... It is just math.

jerrye92002 said...

Are you kidding? When someone takes early retirement, the SSA charges you a "penalty" on your monthly benefit. That sounds like punishment to me. Also, there is NO principal to "grow" because there are ZERO real assets in your Social Security "account." Your benefits continue to grow only because you are making additional "contributions," but those contributions may or may not be commensurate with the additional benefits you accrue, as they would if you held an actual investment. In fact, the first thing people wanting to retire early should do is to graph out the "crossing point" at which the total SS benefit received, starting early, falls below the total of the higher benefits at normal retirement. If that crossing point exceeds your life expectancy you /should/ retire early.

jerrye92002 said...

And nobody is proposing throwing Granny off a cliff. All reform programs I'm aware of have two things in common: A continuation of the current program for those at or near retirement, and a "welfare component" that kicks in at some future point, for those who were grasshoppers in life. Of course, making the private accounts mandatory, again as most propose, will eliminate a LOT of that situation.

John said...

SS Benefit Calculation

So if I choose to retire early...
- Stop retirement savings into Private plan
- Start spending the I&P from my Private plan

Does that mean my Private plan is punishing me because the P&I is growing slower or shrinking faster?

Come now... If you retire early you will have less available to spend each year if you want to stretch the spend to the same ripe old age. This isn't punishment this is investment 101...

jerrye92002 said...

It IS punishment if the government dictates to me what constitutes "early retirement" or "normal retirement age." If I manage my own investments and decide now is the time when my draw-down is sufficient for my likely life expectancy, I'm not "punishing" myself. When government does it, it's punishment because they're telling me how much of "my money" I can have, and when.

jerrye92002 said...

Can we acknowledge that there are differences between SS and a private retirement account?

John said...

There is one big difference...

One is a Private Retirement Account
&
One is a Pension that does a lot of things.

401K vs Pension

jerrye92002 said...

The cite explains the difference between PRA and Pension as defined contribution vs defined benefit. Can you explain how SS fits either of those descriptions? About the closest you can come is that defined benefit plans require you to work for the same employer until retirement. SS is like that. But I note that SS does not ever "vest."