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The Ballooning Welfare State

Henry Hazlitt

Henry Hazlitt is well known to Freeman readers as author, columnist, editor, lecturer, and practitioner of freedom. This article will appear as a chapter in a forthcoming book, The Conquest of Poverty, to be published by Arlington House.

Most of the self-styled liberals of the present day would be astonished to learn that the father of the welfare state that they so much admire was none other than the fervent anti-liberal and advocate of "blood and iron", Otto von Bismarck.

"He was the first statesman in Europe to devise a comprehensive scheme of social security, offering the worker insurance against accident, sickness, and old age. This Bismarckian ‘socialism’ later became a model for every other country in Europe. It represented in part the paternalistic function of the state which Bismarck, as a conservative, had always held."¹

Bismarck’s scheme of compulsory insurance went into effect in 1883, and was soon even baptized by German journalists as der Wohlfahrtsstctat.

The example of Germany was followed by Austria in 1888 and by Hungary in 1891.

It was not till 1912 that compulsory health insurance was introduced in Great Britain, under Lloyd George’s National Insurance Act of 1911. In 1925 came contributory old-age, widows’ and orphans’ pensions. Unemployment insurance was put on a fresh basis in the Unemployment Act of 1934, which set up at the same time a national system of unemployment assistance. In 1945 the Family Allowance Act was passed. It provided for payment to every family, rich or poor, of an allowance for each child, other than the eldest. In 1946 came the National Health Service Act, offering free medical services and medicines to everyone.

Then, in 1948, as a result of the report of Sir William Beveridge, the whole system of compulsory contributions for social insurance was immensely extended, with wider unemployment benefits, sickness benefits, maternity benefits, widows’ benefits, guardians’ allowances, retirement pensions, and death grants.

The continuous expansion of "social security" and welfare services in Great Britain is typical of what has happened in most other countries in the Western world over the last half century. The broad pattern has been remarkably similar: a multitude of "insurance" programs, supported in part by compulsory contributions and in part by general tax funds, ostensibly protecting everyone against the hazards of poverty, unemployment, accident, sickness, old age, malnutrition, "substandard" housing, or almost any other imaginable lack; programs expanding year by year in the number of contingencies covered, in the number of beneficiaries under each program, in the size of individual benefits paid, and of course in the total financial burden imposed.

So, year by year, the tendency has been for every working person to pay a higher percentage of his earned income either for his own compulsory "insurance" or for the support of others. Year by year, also, the total burden of taxes tends to go up, both absolutely and proportionately. But direct and acknowledged taxes have tended to go up less than total expenditures. This has led to chronic deficits that are met by printing more irredeemable paper money, and so to the almost universal chronic inflation that marks the present age.

Growth of Welfare Programs in the U.S. since 1935

Let us look at the ballooning welfare state in detail as it has developed in our own country.

We may begin with President Franklin D. Roosevelt’s 1935 message to Congress in which he declared: "The Federal Government must and shall quit this business of relief…. Continued dependence upon relief induces a spiritual and moral disintegration, fundamentally destructive to the national fiber."

The contention was then made that, if unemployment and old-age "insurance" were put into effect, poverty and distress would be relieved by contributory programs that did not destroy the incentives and self-respect of the recipients. Thus relief could gradually be tapered off to negligible levels.

The Social Security Act became law on August 4, 1935.

Let us see first of all what happened to the old-age provisions of that act. There have been constant additions and expansions of benefits. The act was overhauled as early as 1939. Coverage was broadened substantially in 1950. In 1952, 1954, 1956, 1958 and 1960 (note the correspondence with years of Congressional elections) there were further liberalizations of coverage or benefits. The 1965 amendments added Medicare for some 20 million beneficiaries. The 1967 amendments, among other liberalizations, increased payments to the 24 million beneficiaries by an average of 13 per cent and raised minimum benefits 25 per cent. In 1969, retirement and survivors benefits were raised again by about 15 per cent, effective January 1, 1970.

(It is sometimes argued that these benefit increases from 1950 to 1970 were necessary to keep pace with increases in living costs. Actually, the increases in individual monthly benefits totaled 83 per cent, compared with a 51.3 per cent increase in consumer prices over the same period.)

From $60 to $936

From 1937 to 1950, Social Security was financed by a combined tax rate of only 2 per cent on both employer and employee (1 per cent each) on wages up to $3,000 a year. Since then both the rates and the maximum wage-base have been increased every few years. In 1972 the combined tax rate is 10.4 per cent (5.2 per cent on each the employer and the employee) on a maximum wage-base that has been raised to $9,000. The result is that whereas the maximum annual payment up to 1950 was only $60, it has risen to $936.

In 1947, payroll tax collections for old age and survivors insurance amounted to $1.6 billion; by 1970, these taxes had increased to $39.7 billion.

At the beginning, the Social Security program was sold to the American public as a form of old-age "insurance." The taxes were represented as the "premiums" paid for this insurance. Everybody who was getting benefits was assured that he could accept these with no loss of "dignity", because he was "only getting what he had paid for."

This was never true, even at the beginning, and has become less true year by year. The low-wage receivers have always been paid much more in proportion to their "premiums" than the higher-wage receivers. The disparity has been increased with succeeding revisions of the act. The typical beneficiary even today is receiving benefits worth about five times the value of the payroll taxes he and his employer paid in.2

A Bad Mixture of Insurance and Handouts

The OASDI program has developed into a mixed system of insurance and welfare handouts, with the welfare element getting constantly larger. It is today a bad system judged either as insurance or as welfare. On the one hand, benefits in excess of the amounts they paid for are being given, in some cases, to persons who are not in need of welfare. On the other hand, persons who are in fact receiving welfare handouts are being taught to believe that they are getting only "earned" insurance. Obviously, welfare programs can be expanded even faster than otherwise if they are masked as "contributory insurance" programs.

Our concern here, however, is not with the defects of the OASDI program but primarily with its rate of growth. In 1947, social security benefit payments covered only old-age and survivors insurance and amounted to less than half a billion dollars. In 1956, disability insurance was added, and in 1965, health insurance. In 1970, these payments reached about $39 billion.

Unemployment Insurance

Now, let us look at unemployment insurance. This program was also set up under the Social Security Act of 1935. But whereas old-age insurance was on a strictly national basis, unemployment insurance was instituted on a state-by-state basis within the broad scope of certain Federal criteria.

While provisions have differed in each of the fifty states, unemployment insurance has shown the same chronic growth tendency as old-age benefits. In 1937, the states typically required periods of two or three weeks before any benefits were paid. The theory behind this was that a man just out of employment would have at least some minimum savings; that the state would be given time to determine his benefit rights; and that the benefit funds should be conserved for more serious contingencies by reducing or eliminating payments for short periods of unemployment. Now the waiting period has been reduced to only one week, and in some states does not exist at all.

In contrast with the $15 to $18 weekly benefit ceilings in various states in 1940, the maximums now range between $40 and $86 a week, exclusive of dependents’ allowances in some states.

Reflecting both legislated increases and rising wage levels, nationwide average weekly benefit payments increased from $10.56 in 1940 to $57.72 in 1971. Even after allowing for higher consumer prices, the real increase in purchasing power of these average benefits was 63 per cent, and they continue to increase much faster than either wages or prices. For example, from its average in 1969, the weekly payment in June, 1971, had increased 25 per cent as compared to an 8 per cent increase in wages and an 11 per cent increase in prices.

Fulltime Benefits

As of 1971, state legislation had increased the maximum duration of unemployment benefits from the predominantly prevailing 16-week level in 1940 to 26 weeks in 41 states — and of longer duration ranging to 39 weeks in the other states. In December, 1971, Congress voted to provide 13 weeks additional benefits in states with sustained unemployment rates of more than 6¹³/2 per cent. This made it possible for workers in such eligible areas to draw such benefits up to a total of 52 consecutive weeks.

Total annual benefit payments increased from about one-half billion dollars in 1940 to $3.8 billion in 1970 — more than a seven-fold increase and the highest payout in history. In 1970 alone, total benefits increased 80 per cent ($1.7 billion) over the 1969 level. The combination of legislated increases in maximum weekly benefits and in maximum duration of the benefits has increased nearly tenfold the total benefits potentially payable to the individual unemployed worker in a year’s period (dollars per week multiplied by the number of weeks).³

This is bound to increase still further. On "July 8, 1969, President Nixon called upon the states to provide for higher weekly unemployment compensation benefits. He suggested that weekly maximums be set at two-thirds of the average weekly wage in a state so that benefits of 50 per cent of wages would be paid to at least 80 per cent of insured workers. Only one state — Hawaii — responded promptly with the full raise suggested, but other states have scheduled future increases.

There can be no doubt that unemployment compensation reduces the incentive to hold on to an old job or to find a new one. It helps unions to maintain artificially high wage rates and it prolongs and increases unemployment. One economist has likened it to "a bounty for keeping out of the labor market."4

Moreover, it is a complete misnomer to call it unemployment "insurance." In the United States the workers do not even make a direct contribution to it (though in the long run it must tend to reduce the real pay of the steady worker). Like so-called government old-age "insurance", it is in fact a confused mixture of insurance and handout. Those who are continually urging an increase in the percentage of the previous wage-rate paid, or the extension of the benefit-paying period (to avoid undisguised relief), forget that it violates ordinary welfare standards of equity by paying larger sums to the previously better-paid workers than to the previously lower-paid workers.

But apart from these shortcomings, what we are primarily concerned with here is the tendency of unemployment compensation, once adopted, to keep growing both as a percentage of weekly wages and in the length of idle time for which it is paid.

Just what success, if any, the increasingly costly Social Security and unemployment compensation programs have had in enabling the Federal government to "quit this business of relief" we shall see in a subsequent article.



1 Encyclopedia Britannica, 1965, article "Bismarck", Vol. 3, p. 719.

2 Colin D. Campbell and Rosemary G. Campbell, "Cost-Benefit Ratios under the Federal Old-age Insurance Program," U. S. Joint Economic Committee, Old-age Income Assurance, Part III (Washington, D. C., U. S. Government Printing Office, December 1967), pp. 72-84.

³ Much of the foregoing material on Social Security and unemployment compensation is derived from studies by the American Enterprise Institute, Washington, D. C.

4 W. H. Hutt, The Theory of Idle Resources (London: Jonathan Cape, 1939), p. 129.



Leisure Is Not Free

Leisure is not free. To the extent that we choose it rather than productive work, we exchange it for real income. Longer vacations, more holidays, and other time-off practices — like a shorter work week — must all be charged against real income. The average worker has gained about 50 hours in additional vacation time since 1960. The ten-hour, four-day week may not reduce work time; it may even add to the productive use of resources and equipment. But by emphasizing leisure instead of work it is likely to point in an unhelpful direction.

HERBERT R. NORTHRUP, professor of industry and director, Industrial Research Unit, Wharton School of Finance and Commerce. 

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