Money and Markets: Essays in Honor of Leland B. Yeager

244 Gordon Tullockfor them when the Social Security system was established was only 62 years. Theywere normally not in perfect health when they reached the pensionable age, underthe new system, of 65. Some of them, of course, had saved enough so they couldretire, and those who couldn’t were helped by the regular programs for the poor.There were in those days, as they still are in places like Winter Park, Florida, a lot oflight jobs in which people not in terribly good health could work and earn a living.There was nothing similar to our current national unemployment paymentsystem, but the current system is a logical outgrowth of the previous system anddoes not seem to have been carefully designed by anyone. Basically the nationalgovernment in the United States took on the responsibilities which before the GreatDepression had been carried by local governments. It has been decentralized to belargely administered by the states.The two programs with which Bismarck was, in fact, associated are the old agepensions, and state programs providing medical treatment at the expense of thegovernment. In both cases, they were paid for by a tax on employed persons. Thisdoes have some aspects similar to insurance. If everything works out perfectly, andthere is no significant increase in life expectancy, the average man would pay intaxes over his life roughly an amount which, if increased at the same rate that thenational income grows, would cover his old age pensions and medical attention.More accurately, the actuarial value of his payments plus a multiplier equal to thegrowth of the economy more or less balance. Most people either make a gain or lossif we look at the actual payments and taxes rather than their actuarial value.I said above the average man would pay over his life roughly an amount which ifincreased at the same rate that the national income grows would cover his old agepensions and medical attention. This is true. But Prince Bismarck was a politicalgenius. He realized that people don’t like paying taxes and hence he arranged thathalf of the tax would be paid by the employer through a tax on the wages that hepaid out. The employer of course subtracted this amount from the employee’swage so the only point of this procedure, which has been retained in the UnitedStates, was to deceive the worker on the actual cost to him of the insurance.In the United States, and in some other countries, the program has been used toconceal the unemployment by making unemployment of elderly people illegal.The program varies from place to place and in the United States when the programwas first inaugurated we were in a major depression. If older people were pushedout of work by the program, younger people might get their jobs. This would not,of course, reduce total unemployment, but might affect the statistics on unemployment.Thus it had political advantages if not real advantages.In the United States, instead of making employment of older people illegal it wassimply provided that for every dollar earned by a person of pensionable age andunder 72, a dollar was taken off his pension until the pension was completelyexhausted. Thus work was not illegal but heavily penalized. Needless to say, thisapplied only to the lower part of the income distribution. For upper income peoplethe pension was small enough as a share of their income, so that they were notmuch affected.I should offer here some speculation on the effect of these restrictions on older