A time for choosing

Published 11:00 pm Thursday, February 28, 2013

Back in 1964, Ronald Reagan asked Americans to use common sense to evaluate the value of government programs. In his “A Time for Choosing” speech, Reagan talked about how an America where the tax collector’s share of every dollar was 37 cents made him “uncomfortable”; he criticized the Department of Agriculture for growing their agency, rather than freeing farmers from the burden of government; and he ripped the idea of Social Security by pointing out the basic arithmetic of a bankrupt system.

If Reagan was feeling uncomfortable in 1964, imagine how he’d feel today—50 years later—as the programs he was worried about have ballooned in size and scope. The taxman is still collecting around 38 percent of every dollar we earn, but they’re now taking 38 percent from $15.5 trillion of income instead of $3.3 trillion. Moreover, if the tax man were to collect on our future liabilities and debt, which have exploded over the past 50 years, he’d need to be collecting a lot more per year (on a percentage and absolute dollars basis) than he is now.

The Department of Agriculture didn’t choose to streamline agricultural policy in the US. Instead, we have more complexity in farming and programs, which on the one hand support planting and on the other pay farmers not to plant. Dairy markets remain distorted by price supports, which keep milk prices high and then require more government support to subsidize producers for their excess inventories. Cotton and sugar farming, meanwhile, have large subsidies going to major corporations who don’t need the money but know how to play the political game of getting money.

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In the realm of Social Security and state pensions for public employees, common sense has gone out the window in favor of protecting the status quo. The average American makes around $51,000. Social Security takes 6.2 percent from the average person and then requires the employer pay another 6.2%. Could an average American do better with $6,324 in his own pocket (or own individualized retirement account) each year? I think so.

Since Social Security is always wrapped up in discussions about protecting a person in old age, we can ask how a person would be doing if he were allowed to save the money for retirement on his own. A 21 year old contributing 12.4 percent to a portfolio returning 6 percent per year could look forward to a $1.25 million nest-egg at the age of 65. Our young American could become a millionaire, and this assumes no extra money saved on his own! If we play with rates of return and remember the miracle of compounding interest, the same person could have $2.25 million if he can just squeeze 8 percent annual returns; if on the other hand, he drops dead at age 57, Social Security leaves nothing to him and his family.

Medicare is another entitlement program where we should be applying the same rule: Will all of the dollars taken throughout my life end up paying off in old age? The Medicare take is 1.45 percent for employee and 1.45 percent for employer–$1,479 per year for our average American. If the average American making $51,000 per year thinks his health care bills in old age will exceed $300,000, then Medicare might make sense for him; if, on the other hand, he or she is confident he will live a healthy life (or, at least, die with minimal medical interventions), then Medicare was a waste of resources.

Applying common sense to Social Security and Medicare are what we should be doing with every government “investment.” Reagan tried to get people to do this: If government is acting as a steward of our money, in what areas are we getting high returns on our investments, and in what areas are we getting sold a bill of goods? Once you start down the path of thinking about government spending as investments (and opportunities forgone!), it’s hard to find many areas where they’re doing better things with your money than you could be on your own.

Scott Beaulier is Director of the Manuel H. Johnson Center for Political Economy at Troy University