Entitlements and Guaranteed Bankruptcy

Recently by Gary North: The Police State Is Doomed

Almost nobody these days likes to call a spade a spade in public. In fact, calling a spade a spade in public is a form of political incorrectness. The Establishment puts negative pressure on all those who identify a spade as a spade, if that identification might cost the government a loss of power.

Here are a few examples. We are not supposed to say “government handouts.” Instead, these are called “entitlements.” It is not proper to say “central bank inflation.” This is called “quantitative easing.” Illegal aliens are “undocumented workers.” In true Orwellian fashion, the systematic practice of deception is called “transparency.”

The word “entitlement” is the most value-laden in this list. The promoters of government handouts have long suffered in the United States from a sense of shame associated with taking checks from the government. Most Americans have tried to avoid receiving private charity. To receive charity is a mark of weakness, of failure.

They said to recipients: “This is not charity.” It told voters that handouts were an “investment in the future.” This never sold well. This is why the word “welfare” was substituted for “charity.” But this change in wording did not deflect the stigma attached with going on the dole. So, “entitlement” replaced “welfare.”


The idea of entitlement conveys the sense of ownership. The recipient receives funds that were extracted at gunpoint by the government. Yet the recipients are assured by the government that they are recipients of lawfully earned funds. The real meaning of “earned” in this case is “earned at the ballot box.” The defenders of this system have rewritten the commandment: “Thou shalt not steal, except by majority vote.”

The implication of an entitlement is that the recipient is owed support by the government. His situation — being without money — is not seen as his fault. It is society’s fault. Full employment is a divine right, and the State is regarded as the god of the social order. When the State fails to provide full employment, its agents blame the private sector. It hands out entitlement checks to ease the pain.

The key to the welfare State strategy of extending government safety nets — another phrase for handouts — to the general population is to extract payments and call them insurance. There is unemployment insurance. This is widely accepted. Yet it means going on the dole.

There is old age insurance. Here, we enter the Orwellian world. The Social Security Trust Fund is officially called the Old Age and Survivors Insurance (OASI) Trust Fund. Consider the word magic.

“Social” means State.”Security” means statistical bankruptcy.”Trust” means systematic deception.”Fund” means nonmarketable government IOUs.”Insurance” means revocable contract.

The United States Supreme Court determined half a century ago that Social Security is not in any sense a form of insurance. We read this on Social Security’s Website.

There has been a temptation throughout the program’s history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. That is to say, if a person makes FICA contributions over a number of years, Congress cannot, according to this reasoning, change the rules in such a way that deprives a contributor of a promised future benefit. Under this reasoning, benefits under Social Security could probably only be increased, never decreased, if the Act could be amended at all. Congress clearly had no such limitation in mind when crafting the law. Section 1104 of the 1935 Act, entitled “RESERVATION OF POWER,” specifically said: “The right to alter, amend, or repeal any provision of this Act is hereby reserved to the Congress.” Even so, some have thought that this reservation was in some way unconstitutional. This is the issue finally settled by Flemming v. Nestor.

In this 1960 Supreme Court decision Nestor’s denial of benefits was upheld even though he had contributed to the program for 19 years and was already receiving benefits. Under a 1954 law, Social Security benefits were denied to persons deported for, among other things, having been a member of the Communist party. Accordingly, Mr. Nestor’s benefits were terminated. He appealed the termination arguing, among other claims, that promised Social Security benefits were a contract and that Congress could not renege on that contract. In its ruling, the Court rejected this argument and established the principle that entitlement to Social Security benefits is not contractual right.

The typical voter has never read this. The statement is “transparent,” but it is buried deep in the Social Security System’s Website. It is a classic case of “The large print giveth, and the fine print taketh away.” It has never occurred to the average voter until quite recently that the promises made by Congress can be revoked at any time for political reasons. Who says so? The Social Security System.

The fact that workers contribute to the Social Security program’s funding through a dedicated payroll tax establishes a unique connection between those tax payments and future benefits. More so than general federal income taxes can be said to establish “rights” to certain government services. This is often expressed in the idea that Social Security benefits are “an earned right.” This is true enough in a moral and political sense. But like all federal entitlement programs, Congress can change the rules regarding eligibility — and it has done so many times over the years. The rules can be made more generous, or they can be made more restrictive. Benefits which are granted at one time can be withdrawn, as for example with student benefits, which were substantially scaled-back in the 1983 Amendments.

The phrase, “an earned right,” is another term for “entitlement.” So, “entitlement” in fact means “not legally entitled.” Who says so? The United States government.


The Social Security numbers do not add up. This is slowly becoming obvious to a minority of voters. When combined with Medicare, the numbers are simply ridiculous. There is no way that the promises can be fulfilled.

The estimates of the unfunded liabilities keep rising. The most shocking is the estimate of Prof. Lawrence Kotlikoff of Boston University. He says the U.S. government is in the red by about $200 trillion.

The problem is that this is the estimate for the lifetime deficit of the various programs. This means that there will not be a default for at least a decade, assuming that the Asian central banks keep buying U.S. government debt, and assuming that investors in the United States also roll over the debt. Anything with a timeline longer than five years is considered politically irrelevant. So, despite the fact that the numbers say “guaranteed bankruptcy,” the voters do nothing.

The politicians who run on a tax-cutting ticket usually do not challenge Social Security or Medicare. So, these two programs continue to spiral upward. These are by far the main entitlements, meaning handouts, but because they have been sold to the voters on the basis of insurance premiums rather than payments for the government’s immediate bills (IOUs), the voters regard the promised benefits as contracts: payment for premiums received. This is not what the payments are, as the Social Security site admits, but the voters are unaware of this.

The voters think they are entitled to these payments. “After all, we paid for this.” No, they didn’t. They paid for whatever the government wanted to pay for when it collected the taxes — not “premiums.” The money is long gone. Future payments will be based on political battles over who gets what. The outcome will be based on who has the most votes in Congress. As Forrest Gump’s mother might have said, “Entitlement is as entitlement does.” You are entitled for as long as you have the votes — and no longer.


In 1850, in the year of his death at age 49, Frédéric Bastiat’s booklet, The Law, was published. It remains a masterpiece in political philosophy. Bastiat was an elected member of the French Assembly. He described the politics of plunder.

Men naturally rebel against the injustice of which they are victims. Thus, when plunder is organized by law for the profit of those who make the law, all the plundered classes try somehow to enter — by peaceful or revolutionary means — into the making of laws. According to their degree of enlightenment, these plundered classes may propose one of two entirely different purposes when they attempt to attain political power: Either they may wish to stop lawful plunder, or they may wish to share in it.

We are at the tail end of nearly a century of political plunder. It began in earnest in the years following World War I. There are a few signs that the politics of plunder is moving to the spending-cut phase — the initial phase. Political rhetoric by a few newcomers is not the same as a reversal of political tradition. What tradition? Getting in on the loot.

Woe to the nation when this latter purpose prevails among the mass victims of lawful plunder when they, in turn, seize the power to make laws! Until that happens, the few practice lawful plunder upon the many, a common practice where the right to participate in the making of law is limited to a few persons. But then, participation in the making of law becomes universal. And then, men seek to balance their conflicting interests by universal plunder.

Instead of cutting back on the existing entitlements, the voters at the margin have said: “No new entitlements.” But the existing ones are sufficient to bankrupt the government.

Instead of rooting out the injustices found in society, they make these injustices general. As soon as the plundered classes gain political power, they establish a system of reprisals against other classes. They do not abolish legal plunder. (This objective would demand more enlightenment than they possess.) Instead, they emulate their evil predecessors by participating in this legal plunder, even though it is against their own interests.

Then what is the cure? Bastiat offered only this: universal suffering.

It is as if it were necessary, before a reign of justice appears, for everyone to suffer a cruel retribution — some for their evilness, and some for their lack of understanding.

The bankruptcy of the programs can be delayed by mass inflation. So can partial default: raising the age of eligibility, imposing means testing. “If you have saved too much money, you will not be eligible.” But that is a form of default — bankruptcy.

A few voters see it coming, but they take no steps to get out of the way of the fiscal freight train that is heading toward them. They hear the whistle. They see the headlight. But they do not take steps to avoid getting run over. They think, “The government will find a way out of this dilemma.” Yes, it will: bankruptcy, either open (default on the programs) or rationing.


There will be pain. The system will gore a lot of oxen. The obvious victims will be the oldsters who have become dependent on Federal handouts. They are a powerful swing vote today, but they are in the minority. When the majority of working citizens finally perceive that it is an inescapable choice between handouts to oldsters vs. their families’ solvency, they are going to vote away the oldsters’ handouts.

The oldsters will be trapped. They will be too old to return to the labor force. They will be without capital, other than their homes. They will have planned on lifetime entitlements, despite the clear warning on the Social Security Website. They are entitled only for as long as they have the sympathy vote of workers. When the Federal government cannot sell its bonds, that sympathy will evaporate.

There will be blame-seeking on a scale never before seen in American history. The obvious place to lay the blame will be the biggest Federal budgets: the Pentagon and the geezers. Both special-interest groups will see their budgets cut. Both will see resistance to the now-successful calls for ever-more funding.

To imagine that there will be no retribution is to ignore the history of democracy. Today’s trade-off — “You vote for the military budget, and I’ll vote for more free Medicare” — will switch: “I’ll vote to cut the military if you’ll vote to cut Medicare.”

That day will not come until Medicare threatens the solvency of the Federal government. That will not be before the next Presidential election. It may not be before 2016, although this is not a sure thing. But by 2020, the cuts will be politically inevitable. The workers who are paying the freight will revolt. Politicians will listen to the majority. The majority will say, “Cut them, not us.”

It is imperative that people who are planning to live in comfortable retirement see what is coming. The era of the handouts to old people, merely because they are old, will come to an end when it is clear to voters that it is either the oldsters or the workers who will wind up on the sacrificial altar of political plunder.


In 1850, Bastiat asked a pair of rhetorical questions. They bear repeating.

But if the government undertakes to control and to raise wages, and cannot do it; if the government undertakes to care for all who may be in want, and cannot do it; if the government undertakes to support all unemployed workers, and cannot do it; if the government undertakes to lend interest-free money to all borrowers, and cannot do it; if, in these words that we regret to say escaped from the pen of Mr. de Lamartine, “The state considers that its purpose is to enlighten, to develop, to enlarge, to strengthen, to spiritualize, and to sanctify the soul of the people” — and if the government cannot do all of these things, what then? Is it not certain that after every government failure — which, alas! is more than probable — there will be an equally inevitable revolution?

That day is coming: a revolution. It is unlikely to be violent. It will involve the reduction of the entitlements State. It will involve the vast reduction in entitlements.

The Establishment does not believe in a day of reckoning. Its members do not believe in accounting. They think the welfare State can be saved in much the same way as the insolvent banks were saved in 2009: by changing the accounting rules. But accounting is reckoning, and the day of reckoning is coming.

The government can manipulate the signals of accounting. This leads to the misallocation of capital. That misallocation has economic effects. These effects eventually make themselves felt. When these effects are sufficiently painful, the system of government plunder will change. Today’s beneficiaries will be cut off.

Don’t be one of them when it happens.

November 3, 2010

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2010 Gary North