Government Pensions, Incentives, and Our Everlasting Welfare State
Welfare programs are a cornerstone of an interventionist state, which, despite its demonstrable failures, is rising in popularity, especially among millennials. However, socialism’s adherents are largely unaware of the negative effects of the ideology they so enthusiastically embrace. For example, these advocates should ask themselves why welfare programs persist even when the government is aware of their negative effects on economic growth, especially when the government claims to be a champion of economic growth.
Three years ago, Bill Morneau, Canada’s Minister of Finance, established the Advisory Council on Economic Growth (Council) “to develop advice on concrete policy actions to help create the conditions for strong and sustained long-term economic growth.” In its report "Tapping Economic Potential Through Broader Workforce Participation," the Council noted:
The workforce-participation rate of older workers is 62 percent in the top-performing OECD countries — Sweden, Norway, the United States, Japan, and New Zealand. But in Canada, it is only 54 percent. Closing the gap could add $56 billion to GDP, or 2.8 percent to GDP per capita.
… Pension systems should not discourage working. Older Canadians willing to remain in the workforce beyond the traditional retirement age should not face disincentives. [Emphasis added]
… we believe that the ages of eligibility for the Old Age Security (OAS) program and Canada Pension Plan (CPP) should be recalibrated and increased to meet the Canadian reality of an ageing society and a considerably longer life expectancy than we had just a few decades ago. Increasing the age of eligibility for the OAS — and by association the Guaranteed Income Supplement (GIS), which has the same eligibility age — and the CPP would follow a trend in many other OECD countries, which have extended the age of eligibility in recent years to make their public pension systems more fiscally sustainable.
The Council’s recommendation is based on a concept which is equally applicable to other government welfare programs such as unemployment insurance, child benefits, etc. These programs are a disincentive to employment because government handouts trigger the entitlement mindset, “Why should I get a job when the government is willing to force other people to support me?” Thus, by discouraging productive work, the government’s policies promote the growth of problems they are supposedly trying to solve, namely the alleviation of poverty. As Thomas DiLorenzo wrote :
… the government has, for many welfare families, made getting a job an irrational decision. So it should be no surprise that after spending more than $4 trillion on welfare programs since 1965, the United States has seen poverty increase. [emphasis in original]
… Welfare programs have become an alternative to work. A 1992 study by economists Richard Vedder and Lowell Gallaway found that only 18 percent of welfare recipients moved out of poverty, compared to 45 percent of poor people who did not receive welfare.
The welfare state has done an excellent job of crippling an important cornerstone of an enterprising, free market, capitalist society: the incentive to work.
Since the labour market was one of the areas on which the government asked the Council to focus , it is noteworthy that their advice was rejected out of hand . Noteworthy, but not surprising. Seniors are a large voting bloc, which means economic growth will be sacrificed as the Liberals pander to the desires of pensioners.
Rejection of Council’s advice by Canada’s Liberal government reflects the mindset of the vast majority of politicians, which is to say or do whatever is required to get elected, and re-elected. That is why, when we study the government’s various policies, we see that hypocrisy is the common thread. The government says it wants economic growth, yet it continues to maintain various welfare programs which inhibit economic growth. These are conflicting policies, which means the government’s actions are hypocritical.
Council members were hand picked by the government, and the government did not dispute their advice. They simply ignored it, and have continued to ignore it for two years. Moreover, governments have likely been aware of the counterproductive effects of government welfare programs for decades, just as economists have been aware.
Therefore, it is NOT true that “slower economic growth” is an “unintended consequence” of government welfare programs. In fact, slower economic growth, which reduces overall prosperity, was, and is, the government’s intended outcome. The outcome is “intended” because the government “intentionally” maintains its welfare programs with full knowledge of their negative economic effects. This doesn’t mean politicians like the negative economic effects. It simply means that votes from various welfare constituencies are more important to them than increased prosperity for all groups.
That may sound counterintuitive, but not if you understand the mindset of politicians and bureaucrats. Governments do not usually favor increased prosperity for all groups unless they can claim that their policies deserve credit for this outcome. Thus, increased prosperity for all groups due to the elimination of government welfare programs makes the government look bad.
Guaranteed Minimum Income Theory
Another socialist program which is gaining new adherents is the Universal Basic Income , or some other form of guaranteed minimum income. Many promoters of a ‘no strings attached government-guaranteed-income’ believe such programs will alleviate poverty by increasing employment. They say this is likely because unemployed people will not lose any portion of their government-guaranteed-income if they become employed. In other words, there is no disincentive to work. That’s their theory.
Council’s report blows that theory out of the water. Asserting a causal effect on the workforce-participation rate, Council recommended increasing the age of eligibility for CPP, which is unconditional, and OAS, which is unconditional for people whose incomes do not exceed a specified threshold ($75,910 in 2018). Thus, Council’s position is clear: Unconditional welfare handouts are a disincentive to work. Again, these are the experts hand picked by the leftist government.
Eliminating welfare handouts will incentivize older people to work, an effect likely to be even more pronounced with the younger generations, as they tend to be healthier and more energetic.
Even though a majority of people do NOT trust their government , it is difficult to convince welfare recipients they can prosper by giving up free money. Therefore, the elimination of economically counterproductive government welfare programs may well hinge on voters’ ability to grasp basic economic concepts and dispense with their misconceptions about the ideology of socialism. To borrow a sentiment from Ludwig von Mises , we need to rid ourselves of the idea “that the State or the Government is the embodiment of all that is good and beneficial.”