From Beveridge to Dickens

High on the wish list of the US GOP’s right-wing is the abolition of welfare.  Today some of that argument spilled over to this side of the Atlantic when the Radio 4’s World at One staged a brief debate between Tom Palmer, who is over here to promote his new book ‘After the Welfare State’, and Graeme Cooke of the IPPR.

The right’s argument is based on a steaming pile of falsehoods but well honed in the US for maximum impact.  It should be squashed before it gets established over here.

The central argument is that welfare is a monstrously unsustainable pay-as-you-go (unfunded) system that has accumulated staggering financial liabilities, not just in Britain or the US but generally in the developed economies.  Palmer asserts that in the UK the unfunded liability over a 50 year horizon is an astonishing 500% of GDP, that it’s a fundamentally bankrupt ‘pyramid scheme’ and that if this was done by a company its finance director would be indicted for fraud.

Wow!  Scary stuff.  As of course it’s meant to be.  Part of the plan is to so stun listeners that they react emotionally, not on the basis of rational analysis.

Start with that 500% of GDP deficit; this is the (small) difference between two very large numbers – the income and expenditure of the welfare system – extended over 50 years.  If either very large number is only very slightly out that makes a big difference, a huge difference over 50 years.  So does Palmer really think he knows the future, is he saying that he can forecast these two big numbers very accurately for two generations ahead?  I don’t think he can!  And the corollary is that a small tweak to either income or expenditure or both makes a dramatic change to the claimed deficit.   That is why the government keeps retirement age, contribution rates and inflation adjustments under review and sometimes changes them, for instance in response to increasing life expectancy.  What may look like small changes actually make a big difference.

Then there is the faux alarm about the deficit being ‘unfunded’.  Think about this for a minute.  One way or another the current working-age population has to look after those who are too old or too young or too ill to work so whether this support is funded or not changes the accounting entries but not the underlying reality.

If funded, people save during the years they are working putting their savings into the stock market or a house that they can downsize on retirement.  The next generation’s support is transmitted to them either when they sell their house to a young couple or by the dividends arising from the younger generation’s work.   If unfunded, money simply flows directly from the working cohort to the retired via a government administered bureaucracy.   In practice we use a combined approach in Britain; the state uses an unfunded system to provide a basic but (hopefully) decent safety net, the more prudent add to this through their own efforts – or sometimes by being lucky with their employer!

As for the argument that it would be fraudulent for a company director to run a pension scheme like this, that too is complete nonsense – companies and governments are completely different beasts.  Trying to pretend that apples are oranges is disingenuous in the extreme.

There is a problem with welfare but Palmer didn’t comment on it, possibly because his preferred approach doesn’t help.   The next generation will have to pay so much of their income for housing as a result of the increase in its real price in recent years that there will be little spare income to devote to welfare.  Wealth that should have gone one way or another to support the old, the young and the sick has instead been diverted to enrich the current generation of financiers.   All those bonuses had to come from somewhere.

The real motive behind this right-wing fantasy is, of course, to see welfare privatised which would be a huge windfall for the financial sector.  In place of a public service we would have competition.  Anyone who believes this would be great for pensioners probably also believes in the unicorns and the tooth fairy.

Palmer apparently believes that private welfare worked perfectly well before there was a state system.  As it happens there is a word for that – ‘Dickensian’.

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