SUMMARY OF THE PUBLICATION
“WELFARE STATE: REALITY INSTEAD OF MYTHS”
PREPARED WITHIN THE PROJECT
TEARING DOWN THE MYTHS ABOUT SOCIALISM AND WELFARE STATE
Today, people enjoy the best economic well-being and, generally, live best times in the human history both in our country and in the West. But at the same time, they have been gradually diverting from the roots of current prosperity and freedom while collectivistic approach ideas and their various forms have been gaining more and more space again. Expanding welfare state contribute towards the change in people´s thinking and acts that are directed away from the ethos of individual responsibility, financial independence, voluntary cooperation, and assistance towards the mentality of entitlement and reliance on the government and external financial sources.
The publication aims to present a view, supported by facts and arguments, of the basis of the Slovak welfare state and more generally, also of welfare states in other selected countries and confront welfare state myths with reality. Thus, we want to demask the welfare state and point out its unintended consequences. Succumbing and affiliation to welfare state myths have a real influence on the increase in the government´s reach and interventions by which it significantly reduces both the current and future prosperity and freedom of people.
Strong collectivistic attitudes of people and myths about the role of the government have been confirmed by the public opinion polls carried out by the FOCUS agency within our project Tearing Down the Myths about Socialism and Welfare State. According to the agency´s 2018 representative poll, up to 87 % of respondents agree that the government is to guarantee free healthcare, 81 % agree that higher education is not to be subject to any fees and the education system is to provide services for free, 71 % agree that in developed countries people enjoy a higher standard of living because the government redistributes the resources obtained from the richer to the poorer more significantly, and 69 % agree that people are not sufficiently keen on helping other people in need and that is the reason why the government is to take care of them through a social system. The high level of trust in a strong government instead of personal responsibility was evidenced also by the fact that 68 % of respondents agree that the government should secure jobs and a decent standard of living for everyone and only 16 % agree that everyone should primarily take care of their own job and standard of living (more in the chapter entitled Myths through the optics of current polls).
It is the last statement that fits together with the definition of a welfare state that relieves people from the burden of financial responsibility and assumes this responsibility while making use of taxpayers. As concerns Slovakia, these ideas are not related only to the guarantees provided by the welfare state but also, to a significant extent, to the deep-rooted and socialist era related deformations of people´s thinking. The second thing that makes us different from the Western countries, as a consequence of socialism again, is the significantly smaller amount of accumulated wealth, i.e. smaller resources to finance the welfare state. Declaratively, the welfare state is based on enticing but vaguely sounding objectives such as “social solidarity” and “social justice” that support the Orwellian ambiguity of terms. The real solidarity and justice are linked with personal responsibility and individual acts without forcing anyone else to do anything.
Centralized redistribution of generated financial resources that the government obtains by force and subsequently provides to people to secure their living conditions represents the institutional feature of the welfare state and its “social solidarity”. The welfare state with open and non-targeted benefits functions as the tragedy of the commons with all accompanying devastating financial and moral consequences. We deal with this issue, using Slovakia as an example, in the first part of the publication although the welfare state has not developed in our country to the extent present in some Western countries.
As the initial point of redistribution of resources is their creation, our view of the Slovak welfare state starts with chapter 1.1 Economy and its regulation. Slovakia´s worsening rankings within the Index of Economic Freedom in recent years confirm that despite the systemic improvements of market functioning and business conditions since November 1989, certain restrictions of the business environment and market functions still exist and deepen. The conditions created thanks to economic freedom are the key precondition for generation of the wealth that serves to finance, inter alia, also government programs.
In Slovakia, such programs represent a big and increasing burden due to the expansion of public expenditure in recent years caused also by, for instance, absence of any limits to public expenditure growth, increasing government consumption, and a deformed public expenditure structure featuring various transfers fed by “social packages”. The high number of employees paid from taxes and other groups of people supported using taxes enhances the government´s reach and influence which are manifested also through its proliferating “full-care” features. The government´s redistribution and redirecting of a large part of generated resources reduce the disposable financial resources of people, crowd out private activities, introduce false signals, restrict the current and future prosperity and freedom of people, and support moral hazards and dependency of people on the government (more in chapter 1.2 Redistribution by the government and public finance).
Indeed, extensive and growing public expenditure that guarantees people´s extensive reliance on the government represents a medium for the problems of the welfare state in the areas falling under its primary focus: social security, healthcare, and education system. The problems in those areas result from the very basis of public compulsory centralized schemes that provide people with a wide extent of guaranteed entitlements covered by taxpayers´ contributions, but often without any real financial coverage. Old-age pensions may serve as an example. This is how the welfare state feeds the myth of “free lunch” among people while negating the basic economic concept: scarcity.
Extensive and increasing entitlements and related expenditures are based on the relevant legislation supported by the positive rights guaranteed by the constitution. The constitution opens the legislative “door” to such entitlements by, for instance, guaranteeing the right to the minimum wage, free healthcare, free education, and by setting 64 years as the age limit giving rise to the entitlement to adequate old-age pensions. The social system is deformed by financial pressures due to using taxes and compulsory contributions to support a standard of living that often exceeds the basic standard for a number of people; this is particularly true when it comes to the PAYG pension scheme and non-targeted family benefits.
Our country is no exception and the unintended consequences of the government´s full-care approach manifest themselves as the welfare dependency culture, a low level of motivation and taking care of oneself and family, economic inactivity trap, reliance on the government and external financial sources, and displacement of voluntary solidarity and private initiatives. They significantly weaken the responsibility of individuals for their own lives and this particularly as concerns the old-age pension system where people depend to a remarkable extent on external financial sources and political decisions. A system set up in this way gives rise to moral hazard and the “begging hands” motivation that is perverted in terms of economics or, generally speaking, to the mentality of entitlement. Moreover, it causes also a great financial burden (a high level of compulsory contributions, for instance) and disproportional future financial requirements (more in chapter 1.3 Social system and social security).
The enormous future financial burden has been cumulating particularly within the PAYG (pay-as-you-go) pension system both in our country and abroad. The system in Slovakia is systemically defective and its inherent deficit has been deepened by recent changes, i.e. primarily by implementation of the pension age limit thanks to which the debt within the system will increase significantly. By approving the age limit, MPs approved uncovered long-term pension related liabilities which have only worsened the pension system´s financial outlooks and this as concerns both payers and their contributions and pensioners and their pensions. In addition, population ageing will speed up the devastating financial problems within the pension system and develop pressure to increase public expenditures, especially those associated with long-term care and healthcare provided to older people.
Another segment with systemically deficient setting is the healthcare sector where it will be necessary to make expectations realistic and to restrict the entitlement to financing from compulsory health insurance contributions and taxes. It is not possible to promise unlimited healthcare services with a limited amount of money (more in chapter 1.4 Healthcare system). Another welfare state area is the free education system. Its failure results from the very basis of this publicly provided and financed service and we focus on the inefficiency of the public education administration, the system´s resistance against the pressures aimed at its reform, and the absence of consequences due to selected studies, competition generated pressure, and a motivation system. Higher education students are not motivated to pay attention to the quality of educational institutions and its importance for their future and the system lacks also the interconnection between studies and the labour market (more in chapter 1.6 System of education).
The labour market is also in focus of the “caring” state, which is manifested, in particular, through many governmental regulations covering the area of employment and the labour price regulation as legislators approved an increase in the minimum wage up to 60 % of the average wage. In chapter 1.4 Labour, employment, and market regulations, we draw attention to the negative unintended consequences involving a reduction in job opportunities and an unemployment rate increase which will be multiplied by the consequences of the coronavirus crisis. Therefore, the syndrome of the full-care government restricting competition and people´s freedom of choice still exists in Slovakia and it manifests itself not only within the economy and social area but also within the civil society that is pushed away and restricted by the government as well (more in chapter 1.7 Civil society).
It is useful to know the consequences appearing in welfare states with open positive rights and entitlements of people to the money of other taxpayers, which have been applying this system in a long run. The second part of the publication presents the experiences from selected countries that are remarkably richer than Slovakia. During the 20th century, the level of redistribution by governments of those countries of the resources generated by their economies increased enormously due to the influence of the pseudo-culture of care provided by the government (from approximately one tenth up to one half) which was accompanied by escalating interventions into people´s lives.
Due to the fact that the term welfare state is mostly associated with Sweden (and other Scandinavian countries) within the public discourse, we start our overview of foreign experiences with this country. It is a story of success and great enrichment thanks to the market principles and reforms taking place during the 19thcentury, a massive welfare state developed after World War II until the 90-ties when it collapsed, and the following transition towards a government reduction and deregulation. The comparison of the 7 % public expenditure/GDP ratio by the end of the 19th century with 72 % in 1993 and 52 % today may serve as an approximate indicator of that process. Unlike in Sweden, no such turn has taken place in France and that is why adverse consequences of the strong government cumulate there which means, in particular, already big and still increasing tax and regulatory burdens and an excessive public debt that is officially at the level around 100 % but implicitly it reaches around 300 %.
We also present two examples of corporativist welfare states – Germany and Austria. It was Germany where Otto von Bismarck started the era of welfare states and thus also the substantial transformation of societies to more collectivistic. In the 80-ties of the 19th century, he was the first to introduce a pay-as-you-go social insurance system where, for instance, within the pension insurance system the economically active people compulsorily pay contributions to finance pensions for current pensioners while their future entitlement to pensions that arises for them will be satisfied making use of the compulsory contributions provided by those who will be economically active in the future. Despite implementing it at a minimum level, he opened Pandora´s box for transformation of the society towards a greater dependence and reliance of people on the government and political decisions. The PAYG pension system represents, in its current extended version and at the time of population ageing, a financial time bomb.
We have also chosen two Anglo-Saxon countries – the United Kingdom and the U.S.A. to illustrate the negative impacts of the welfare state on economy and society. Those countries became rich and were examples of successful societies thanks to capitalism and overall freedom. The failing British healthcare system and education system that functioned successfully before the rise of the welfare state serve as a memento. In the U.S.A., more and more people become subject to various state support programs and the implicit debt becomes extremely high – it amounts to 500 % of GDP only as concerns programs Social Security and Medicare.
In the last chapter, we present a specific example of consequences of an experiment with welfare state elements at a multinational level in the European Union, i.e. Joint Agricultural Policy, Cohesion Policy, the European Central Bank Policy, and Eurozone financial bail-out mechanisms. The combination of the Eurozone as a transfer union with generous and indebted welfare states represents a special risk resulting for instance from the EU´s financing their non-reformed pension systems.
In the publication, we present an initial overview of the substantial context of the Slovak welfare state and more developed welfare state forms existing in other countries. And it is especially the experiences of foreign countries with more passive and more welfare dependent people which may serve as a memento. Moreover, it is important to be aware of the systemic risk of financial collapse of welfare states and, in particular, of PAYG pension systems. We believe that our publication will contribute, even if only little, to people´s becoming more aware of the systemic deformation and risks associated with expanding welfare state and will think and act more in compliance with the ethos of individual responsibility and freedom, financial independence, voluntary cooperation, and respect for property and other civilization values thanks to which we live the best times that the human kind has ever experienced during its history.
Annex: Table of Contents of the publication “Welfare State: Reality instead of Myths ”
Editor: Peter Gonda
MYTHS THROUGH THE OPTICS OF CURRENT POLLS (Radovan Potočár)
1. REALITY VS MYTHS: WELFARE STATE IN SLOVAKIA
1.1 Economy and its regulation (Radovan Potočár, Peter Gonda)
1.2 Redistribution by the government and public finance (Radovan Potočár, Peter Gonda)
1.3 Social system and social security (Jakub Šimek, Peter Gonda)
1.4 Labour, employment and labour market regulation (Róbert Radovan Potočár)
1.5 Healthcare system (Peter Pažitný, Rudolf Zajac, Beáta Gavurová)
1.6 Education system (Martin Reguli)
1.7 Civil society (Boris Strečanský)
2. REALITY VS MYTHS:EXPERIENCES FROM WELFARE STATES IN OTHER COUNTRIES
2.1 Sweden (Martin Reguli)
2.2 France (Martin Reguli)
2.3 Germany (Martin Reguli)
2.4 Austria (Martin Reguli)
2.5 United Kingdom (Boris Fandák)
2.6 United States of America (Martin Reguli)
2.7 European Union and welfare state (Martin Reguli)