The old should pay for themselves

None of you bastards showed up to listen to me talk about “the old should pay for themselves” (specifically: getting rid of the old-age pension) at the Festival of Dangerous Ideas. This is the summary of what I said…

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Some see the debate about the old-age pension as between those who care about people, and want to give them money, and those who don’t care about people and want to see them starve. Given that choice, most people choose to be a good person. And that must mean I’m a heartless bastard. Perhaps.

But I see this debate differently. There will always be a pension system — the only question is whether we have a government approach (funded by tax and managed by bureaucrats) or a community approach. This debate is not “markets v government”, but “community v government”. I prefer the community approach.

100 years ago there was no government welfare system (including the old-age pension). People with a pro-government bias might assume that there was no welfare system. This is wrong. Before the introduction of the government welfare system there was a large, growing, efficient and effective voluntary community welfare system that has been nearly entirely forgotten in modern welfare debates.

The government did not invent the welfare system; they nationalised it.

Community welfare

This was not charity. It was people voluntarily coming together in social groups to manage the problems of life. The most common form was the “friendly society”, with names such as the Foresters, Druids or Oddfellows. Starting around 500 years ago, workmates, neighbours or social groups (often meeting in pubs) started to put money aside so that they could help out any group member in trouble. From the beginning there was always a strong social element — and this is one of the main reasons why community welfare is preferable to government welfare.

Around 200 years ago friendly societies started to become more popular. As the industrial revolution saw more people leave their rural communities and enter the cities for a higher (but less certain) income, the demand for community groups increased. In 1801, about 20% of England (where we have the best data) was covered in the community welfare system. By the early 20th century (when the government destroyed community welfare) it was up to 55% and growing faster than ever. If the growth trend had continued (and there is no reason to believe otherwise) then we would have had nearly universal community welfare coverage by the mid-late 20th century.

As well as becoming more popular, community welfare was also improving. Friendly societies joined together to form “federations” of societies with members around the country (and sometimes around the world) so you had an instant community and service centre wherever you went. They were also getting better at money management, and were offering new services such as widows care, orphanages, and old-persons homes. And because community groups were built up naturally, there was a diversity of approaches which allowed choice and competition, so groups could quickly learn from each other and become more efficient and effective.

But perhaps the most important benefit from community welfare were the social benefits. In contrast to government welfare, community welfare actually had a strong social element — where community members would regular visit their sick comrades and offer additional informal help outside the system. They also fostered tolerance (allowing any religion or political creed), equality (anybody could join and become a leader; and membership primarily came from the working class) and democracy (the leaders only got their power from the governed). There was a high premium put on personal development — encouraging responsibility instead of dependence, teaching new skills, and promoting benevolence. The community system was not just a place to get help when you needed it… instead it was a place to get help when you needed it, and help others when they needed. In other words — community welfare helped to build community, leading to greater social inclusion and social cohesion. What today would be called “social capital”.

That was the community welfare system; and that was what the government destroyed when they gave us the welfare state.

Government welfare

The 19th century was the century of the market & community. The 20th century was the century of the state. Following the lead of German nationalists and scared of the growing socialist threat, the western world introduced a government welfare system. Then in the great depression & WW2 the welfare state was expanded (giving us the “temporary” income tax we have today). And finally in the 1970s (LBJ, Whitlam) the welfare state was expanded again into the modern version we have today.

The government is now bigger than ever in Australia’s history, but not because we are socialist. During the 20th century the western world debated about wether the government or market was better at running business, and the market (mostly) won leaving us with private butchers, airlines and factories.

But instead of nationalising business, the government has nationalised people and communities; what might be called “neo-socialism”. We have had the “socialist calculation debate” about business, now we need the “neo-socialist calculation debate” about community.

Currently, the welfare state costs over $250 billion per year (23% of GDP), of which about half is pointless churn from the taxpayer to the government and back to the same taxpayer in the same year. The consequence has been an inefficient, unsustainable and inequitable system and the destruction of the community welfare system.

Government welfare has none of the social benefits of community welfare. It does not increase social capital, but destroys it. It does not encourage responsibility, but undermines it. It does not lead to more benevolence, but more selfishness. It does not lead to greater self-esteem, but self-loathing. Community offers dynamism and diversity; government offers stagnant bureaucracy and conformity. The community sector is perhaps the most important area of our life — where we learn to be responsible and considerate adults — but this area is fast being taken over by politicians (such as the recent case of a lady being threatened with jail if she continued baby-sitting her neighbours’ children).

Economic costs of aged pension

As if this wasn’t bad enough — the government welfare system doesn’t even work well.

The old-age pension is making Australia poorer. Many people are uninterested in economic growth, and that is fair enough. For people with decent jobs and decent incomes, a bit more economic growth isn’t going to make us much happier. Importantly, for high-income earners it is community that leads to happiness. But for low- or no-income earners, economic growth is still important. No country has ever gotten richer by passing a law that simply says “we are rich now”. The only sustainable way to reduce poverty and increase low wages is economic growth.

The aged pension hurts our economy in two ways. First, the $40 billion in taxes needed every year distorts the economy, leading to worse business decisions and making us all poorer. Second, the pension replaces private savings leading to lower national savings, lower national capital stock and therefore lower national income. Based on a simple model of the Australian economy, the impact of our aged pension is a minimum wage $1000 lower than otherwise, an average income $2000 lower than otherwise and 50,000 people out of work. On top of that, the tax itself actually costs about $4000/year on average for all income tax payers.

The conclusion is clear — if you care about low-income people and the unemployed then you should be worried about the consequences of the aged pension (and the welfare system in general).

If the economic argument is too dull, then a more dramatic problem with the pension is that it is simply unsustainable. Given the aging population and the current welfare system, Australia (and the western world) is facing a fiscal crisis. The Intergenerational Report (which doesn’t include future policy or State governments so is an underestimate) explains that we’ll need an additional 5% of GDP by 2047 just to pay for the current welfare state… and aged care makes up about 3% of that.

This means a doubling of all costs. The tax bill will rise from $4000 on average up to $8000 on average, the impact on wages will double ($2000 for minimum wage, $4000 for average wage) and 100,000 will be unemployed because of our aged care system. And more to the point… the problem is only going to get worse. Eventually it will be unsustainable.

And this raises a point of equity. We know that some generation is going to be left with a broken system. Somebody will have to spend their life paying thousands of extra tax, earning thousands less every year, just to keep a system that will not help them. We might be able to get away with the current system until we’re retired, but then we’re just passing a huge mess to the next generation, who can’t yet vote and haven’t yet been born.

Work-leisure balance

There is another cost from the government pension system that is less well known: it distorts our work-leisure choices.

Imagine that you are told you have sixty years of adult life, and that you have to work for 40 years and can have leisure for 20 years. How would you choose to arrange your leisure time? Perhaps two years work, one year holiday? Perhaps take a four month holiday each year? Perhaps (like me) work part-time and take extended holidays.

Or you could work like a dog for 40 years, and then take the last 20 years off.

Personally, I think the last approach is the dumbest… but we have a strong set of government incentives that is socially engineering this outcome. I want my leisure time now; and I want to work (part-time) when I’m old. If somebody wants to do the “last 20 years off” approach than that is their right, but we shouldn’t have a system biased for that outcome. I suggest that a community welfare approach would have the flexibility to deal with people who made other choices in life.

The alternative

The government approach is broken. The two alternatives are (1) saving for retirement; and (2) community welfare.

The savings approach is the obvious approach, and the one being used in many countries (including Chile, Singapore, Hong Kong, and partially in Australia with compulsory super) and it will certainly be part of the solution. The Chile reforms show that you can get significantly better outcomes using the savings approach (retirement incomes are now 50-100% higher than what they would have been under a government pension; national savings is higher; economic growth is higher).

But personally, I’d like to see a return to community welfare.

It will be hard to rebuild. The government managed to kill community welfare quickly, but it will be more difficult to bring it back. Still, given the important social benefits of community welfare, I think it worth trying.

There is still the question of those left behind. This problem should not be over-estimated. As other examples around the world and through history have shown, most people will be able to manage their own affairs through a mix of savings and community welfare; only a small minority will not manage (for example, only 0.08% of Australians are “living rough” homeless).

For those people, they would still have access to the disability support pension (most people who can’t look after themselves have a disability or substance abuse problem), and we currently have over $10 billion worth of charitable money every year (and this would grow in a community-based approach to society), which would be more than enough to help them. But finally, if you were really unwilling to trust the community sector, the government could offer subsidies to poor people to join community groups.

Either way, there is no need for the government aged pension.

Conclusion

Many political debates are “markets v government”. But the welfare debate, including the aged pension is different. This debate is “community v government”.

The western world once had an effective and efficient community welfare system that encouraged social cohesion and personal responsibility, but we replaced it with an inefficient, unsustainable and unfair government approach that is destroying social cohesion and personal responsibility. It’s time to go back to the community approach.

10 thoughts on “The old should pay for themselves

  1. This does look like a good thing to aim at, but there are transitional issues. I addressed these in a submission to the Henry Tax Review, here and here. This also received some comments in a thread at John Quiggin’s blog.

    My submission didn’t go into detail on end stages like having mutual/community approaches, but those are very much part of my thinking; they are hidden behind the idea of transitional funds at arms length from governments, in that submission and in my later one on wider topics. I would want later reforms to hook those funds up with extended family and mutual/community approaches. You can find more on mutualism at Kevin Carson’s blog. Modern versions of Distributism, e.g. at The Distributist Review, are relevant as well.

  2. When I’m retired I hope to have time to attend such talks. My other defense was that I was not in Sydney that day.

    This is a very well presented piece. Did you have a sizable audience? How was it received?

  3. About 80-100 people I guess… a mixed response. The most hostile response came from the “host”, who ended up being more like a discussant.

    He insisted that community has already collapsed, and so the government had to come to the rescue. Of course, this runs 100% against all of the evidence which clearly show community groups increasing in popularity up to the point when government welfare was introduced.

  4. Not such a bad thing IMO Foxwood.
    Because Obama is explicitly a socialist, it will therefore be much more difficult to blame capitalism, or complications from the mixed economy when he gets poor results economically.

    Politicians are brilliant at hiding the massive harm they create, but Obama is not as pragmatic (anti-principle) as most politicians. Most politicians are quite happy to mix a bit of regulation here, a bit of “free” markets here and a bit of facism/socialism there. Obama’s ideology is very leftwing. Unlike Bush, he can’t pretend he was pro-markets. This will mean there’s less place to hide when things go pear-shaped.

  5. Re #5.
    My personal experience is that statists strongly dislike the idea that government programs decrease community feeling and goodwill.

    I think it’s an extremely interesting and powerful point to note that the more capitalist a society, the better the community spirit.
    (I am not implying that the political system is the fundamental here, I think the community spirit is the fundamental which arises from philosophy. But I do think there is a feedback type mechanism at work – ie: I feel depressed because I’m fat, but I eat because I’m depressed type of system – where socialism and facism make people less trustful and benevolent towards their neighbours).

  6. What are time bombs of Australia democratic society?

    The historical hung parliament demonstrated the big gap inequality society between the groups get highest pay by talk feast used mouth work, the groups get lowest pay by hands work?

    Voters’ voices do not hear?
    Voters’ pains do not ease?
    Voters’ cries do not care?

    1. Poverty will not be phase out if no fairer resources to share;
    2. Illness will not be reducing if no preventive measurement in real action;
    3. Agriculture will not be revitalize if urbanization continuing its path;
    4. Housing affordability will not be reach for young generation if government continues cashing from young generation debt by eating out the whole cake of education export revenue without plough back;
    5. Manufacture industry will shrink smaller and smaller if no new elements there to power up to survive;
    6. Employability will not in the sustainable mode for so long as manufacture and agriculture not going to boost.

    Ma kee wai
    (Member of Inventor Association Queensland since 1993)

  7. What we live in this world? contribution to moving forward od dstruction in moving forward that live asame???

  8. What democratic societies should learn lessen from Australia election 2010:
    1. What voters crying for reforms not just parliament, but for all department?
    Voter’s pains did not link to high income Politicians and Bureaucracy.
    The Australia historical hung parliament demonstrated the big gap of inequality society between the small educated elite groups who get highest pay by talk feast used mouth work controlling live essential resources of the country in every social platforms against the biggest less educated groups who get lowest pay by hands work squeezed by discriminative policies that sucking live blood from individual poor/less wealth off?

    Voters’ voices do not hear?
    Voters’ pains do not ease?
    Voters’ cries do not care?

    Voter is crying for department reforms over 70 years that resulting a 2010 Hung Parliament?
    An iceberg example of voter’s crying:
    “……it seem to me there was an unfair to treat me when the merit of “Claim for Disability Support Pension or Sickness Allowance” form in detail clearly defy 15 hours classify the cut off point for acceptance, when comparing to my early assessment completed in June this year that it has the merit less than 8 hours (0-7) work capacity due to my long term medical impairment since an injury occurred in 2005”…….
    It was disappointing where the push of Parliament reform that mainly to brink good news to all MPs by the individual MPs during this year historical hung parliament in 70 years, and the reform did not including all Government Departments where it would directly brink good actions to all voters/or people?

    Ma kee wai
    (Member of Inventor Association Queensland since 1993)

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