Freeman

ARTICLE

We Can't Afford It!

JUNE 01, 1960 by J. EDWARD DAY

Mr. Day is Vice-president of The Prudential Insurance Company of America.

As the new decade dawned, we saw many predictions of the bold new things needed for the surging population of the sixties. There was mention, of course, of new plants and facilities to provide new jobs, of more homes, and of more new products to go with those homes. But where in another era this awakening to rapid growth ahead might have meant expanded farm output, new rail lines, more steel capacity, and the like—financed in the past by pri­vate capital—the top needs now emphasized are highways, schools, airports, rapid transit, water re­sources, public housing for the elderly, more hospital beds, more capacity in colleges and universi­ties, space research, "closing the missile gap," aid to underdevel­oped countries—all of which must be financed in whole or to a predominant degree by public funds.

We are used to hearing it said that even though a certain pro­gram might be desirable for adop­tion by a city, county, or state government, the particular govern­ment unit simply can’t afford it. Each of us is familiar with situa­tions where local governments have "made do" with older public buildings, or with something less than perfection in quality of serv­ices, pay levels for public em­ployees, and modernization of streets, sewers, and schools.

There have always been those, of course, who insisted the federal government could not afford this or that new or expanded program. But the fact that the federal gov­ernment can go hugely into debt without voter approval of bond issues (states and cities usually can’t), has made the ceiling on federal spending highly flexible. So on federal spending, those who could make a good case for "desir­ability" could almost always pre­vail over those who asked, "Where’s the money coming from?" For the federal money was always forthcoming—even if it meant, as in fiscal 1958-59, a $12 billion deficit in a peacetime year.

Suddenly, at a time when pres­sure for public spending at all government levels was never greater, the day of reckoning has arrived. Eighty billion dollars of the federal debt must be refinanced in 1960 at a time when 5 per cent federal bonds have appeared on the scene for all to see. All at once we hear about "gold drain" and "deficit in international payment balances" and even "flight from the dollar." Getting federal spend­ing and debt under control is no longer a matter of argument—it is a crystal clear necessity.

Near term federal tax reduc­tion seems less and less a sensible possibility. State and local taxes seem bound to continue their up­ward climb. The theory that the federal government was going to confine itself to certain kinds of taxation and the state and local governments were going to confine themselves to others, has proved to be just that: a theory. State in­come taxes (with ever higher rates), school district income taxes, and city payroll taxes are competing for the same net earn­ings dollar as the federal income tax. And by 1969 the Social Se­curity tax, even to support the program as it now stands, will be 9 per cent of taxable payroll—with half to come from the em­ployee (and not deductible from the employee’s federal income tax).

We have to face up to our total needs for future spending at all levels of government, assign prior­ities among programs and proj­ects, do some major retrenching in existing public programs to preserve solvency, and then decide whether we can afford to open the door to a vastly expensive, ex­pansive federally financed health care program.

The Forand Bill would amend the Social Security Act to provide broad hospital, nursing home, and surgical benefits for all persons—already 13.7 million—receiving payments from the Social Security program. This group includes not just those men over 65 and women over 62 who are entitled to bene­fits, but also widows with chil­dren under 18, and totally disabled persons entitled to benefits and their beneficiaries.’

1 Editor’s Note: What may have hap­pened with regard to the Forand Bill by the time this article appears in print is anyone’s guess. But there need be no doubt about the economic consequences of any such political measure.

To provide the benefits proposed to the limited group described would cost over $2 billion the first year and between $6 billion and $8 billion by 1980. It would mean that Social Security costs would increase by 26 per cent on a long term basis. Where Social Security will cost nearly 9 per cent of pay­roll by 1969, just as it now stands, the Forand Bill would bring the over-all cost to 11 per cent of tax­able payroll.

What is more, (1) the Forand Bill, if enacted, is bound to be only a "first step" to an enormously ex­panded and still more expensive federal health care program, (2) invariably these publicly financed health care plans (such as in Eng­land and Canada) have cost far more than was estimated when they were proposed, (3) other ex­pensive liberalizations of the So­cial Security program are in the offing, (4) the Social Security pro­gram as it now stands may be so badly underfinanced that major tax increases may be needed just to pay for benefits already promised.

No Further Leeway

Let us face up to another new fact of life that has overtaken us fairly recently. Where in the past our federal government had a large amount of leeway, through deficit spending and increased debt, to conduct a crash spending program in case of war or depression, the leeway is now gone. In view of our situation on federal borrowing difficulties, it is clear we are gam­bling there will be no international blow-up and no economic blow-up.

If we did have either, the money would have to come from practi­cally confiscatory tax increases superimposed upon the wartime tax levels we have continued into peacetime.

Present-day taxpayers will find it ironic to be told that govern­ment financial leeway exists only in still higher federal taxes. But that is the sad fact. And even that weak reed, that inadequate leeway, is being weakened still further by rising Social Security tax rates. Social Security taxes must come out of the same pie (i.e., tax base) as taxes for missiles, federal debt service, highways, schools, city police, county jails, or whatever. For obviously 100 per cent of the public’s earnings is the whole tax source pie: the complete, final, nonexpandable tax base, no matter what the tax or the tax purpose or the taxing entity is called. It doesn’t help to say that Social Security taxes are "special pur­pose" or "not in the federal budget." Except for a capital levy (an unthinkable device) all taxes, no matter what they are called or where they are budgeted, have to come out of earnings of the public. Many have a mistaken belief that Social Security is a savings plan, with the payroll taxes saved up to provide for the employee’s future benefits. The fact is that Social Security is a pay as you go plan—or, more accurately, an under pay as you go plan.

We have graciously provided that employees of 1969 shall pay a 41/2 per cent rate for the benefits for which employees of 1959 paid 21/2 per cent (3 per cent beginning with 1960).

The Social Security Trust Fund is in fact only a contingency re­serve. Some estimates, based on the existing program, say the Trust Fund will be used up en­tirely by the year 2000. But, big as the Trust Fund seems, it would have to be three times as big as it now is just to pay future benefits to the 13.7 million people already on the benefit rolls. And other tens of millions are qualified to become new recipients in the future.

Already we are postponing the evil day on paying for the present Social Security benefit structure. When it comes to the multibillion dollar addition to the structure proposed by the Forand Bill—we can’t afford it!

 

 

***

Ideas on

Liberty

Worth Repeating

A crash attack on the major problems of health suits our im­patient culture. But those who might be commissioned to do the research know that it is poor strategy. At present we are more limited by the state of general scientific knowledge than by want of specific instruments or difficulties in engineering… Histori­cally the method of uncommitted wondering has been the source of major ideas. From the confusion of detail general principles emerge—not because they are summoned for some crash pro­gram but because they are already latent in the facts that are available… Obviously we, in various specialties, and the public at large have a common interest in seeing that a substantial base of scholarship is supported in its own right and not as an instru­ment in achieving some popular goal… It may indeed be proven by history that ignorance and folly were greater evils than cholesterol or cancer.

VINCENT P. DOLE, M.D., On Crash Programs

ASSOCIATED ISSUE

June 1960

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