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The modern welfare state — taken to the extreme by radical social democracies — was founded by the “iron chancellor” of the German Empire, Otto von Bismarck, calling it state socialism. Despite the positive media coverage and popular appeal, the welfare state is unfeasible in the long run and it relies on three lies:
The first lie is about funds. There is no such thing as long-term funding of the welfare state. The welfare tax, besides being mandatory, has no relation to the long-term funding of this welfare state. The taxes contributed by the current generation are immediately used to pay for the generation that uses it. This is about an intergenerational transfer of wealth that heavily depends on the premise of having more individuals contributing than taking. To put this simply, you are paying for the social security benefits of those currently receiving it, not yours. Your benefits will be paid, if you’re lucky, by those who will be taxed by the government at the time.
Financially speaking, this is literally a Ponzi scheme. The only reason is not illegal is that it is perpetrated by governments. The deficits are expected to be covered by taxes or by the fiscal deficit. It is not a problem if the government does not have enough money to pay for today’s benefits, because guess what? They will charge you tomorrow for those benefits. Nationalized social security is an accounting fiction that conceals taxes and fiscal expenditure. Contributions are taxes, spending is government spending. Social security obligations are implicit public debt.
Although jurists argue that, broken the principle of unity of the budget, such revenues and expenditures are neither taxes nor tax expenditures. The truth is that economically they are government revenues and expenditures. Not only because deficits are ultimately covered with tax money, public indebtedness or inflation, but also because all over the world the resources of the nationalized social security are “invested” in public debt, mostly or exclusively, either debt of the central bank or debt ultimately guaranteed by the budget. And in this third lie, that of the State “investing” in its own debt, the serpent bites its own tail.
Private-funded pension funds are financially efficient. They free up the budget for state-run health care, which is in itself inefficient. But where they exist, they are under attack from the left with populist promises as unfeasible as they are politically attractive.
Future social security is already economically unsustainable
The self-proclaimed supreme court of the global progressive dogma, the Davos Forum, considers the risk of the collapse of social security to be of little impact, although it would be the bankruptcy of the welfare state. A few of the many things that the pandemic taught us are that state-run health systems are weak, central planning always leads to failures, and that multilateral organizations have no idea how to lead in times of crises. Political and corporatist elites run to scare tactics, instead of engaging in the preventive health debate.
Globally, the population over 65 is increasing. That’s good news. But in most of the developed world fertility rates are declining. There won’t be enough people entering the labor force to pay the benefits of those retiring. And longer lives mean higher retirement and health care costs.
Let’s see where it was born: in Germany, before the pandemic, public debt had reached unsustainable levels. And contrary to the absurdities of Modern Monetary Theory, the truth is that creating currency does not solve it, it makes it worse. The prestigious think tank Stiftung Marktwirtschaft reports German explicit debt annually. In 2019, the total debt in Germany reached €7.6 trillion. German public debt was equivalent in 2019 to 60.9 % of GDP. But the actual debt equaled 164.8 % of GDP that year, while in 2018 it equaled 145.5 % of GDP.
To start balancing it, they would have had to reduce social services by 5%. Or increase 6%, both explicit and implicit taxes: social security charges, which with its high implicit and explicit tax burden is as politically costly as reducing benefits considered rights. In other words, they must start abolishing its welfare state.
A time bomb
And what was already unsustainable before the pandemic worsened exponentially with the Draconian blockades that brought German supply chains to the brink of collapse by disrupting the capital structure. Germany’s real debt could rise to 400 percent of its GDP. In the rest of the European Union, the problem is similar or worse. With few exceptions, European states have higher official debt figures than Germany, which also do not include future pensions and healthcare liabilities.
It is a financial time bomb capable of putting the entire economy in check by collapsing their welfare states. And it is a political time bomb that would destroy the social cohesion without which democracy would self-destruct. Only Switzerland -which is not part of the EU- is in a better position.
Most of its social security is privately insured. Health insurance, though compulsory, is insurance in the actuarial sense. And there is a reasonably serious debate about welfare and health systems and the welfare state as a whole. But even in Switzerland regulation has increased health care costs, compulsory insurance has shortcomings and pension schemes have financial weaknesses.
Meanwhile, in the United States where the new Democratic left is intent on taking its own welfare state to heights never reached even in the most radical social democracies of Western Europe, the Goodman Institute estimates that Social Security already has long-term unfunded liabilities of $34 billion. So the system would reach insolvency by 2034.