Pensions Made Fun

The Gist: 2 of 3 of your federal tax-dollars are spent on entitlements. It all started in 1776…

A review of The High Cost of Good Intentions by John Cogan.

The first of three parts. Click here for part two, and here for part three.

The American Civil War was fought between 1861 and 1865. Take a moment and consider: when do you think the U.S. government paid out its last related pension?

< cue Jeopardy theme >

As of 2017, over 150 years after the war ended, the U.S. government was still paying a Civil War pension.

Snake Oil

Figure 1. Turns out those snake-oil cure-alls did dramatically extend life.

 

How the hell does that happen? John Cogan’s The High Cost of Good Intentions recounts the history of American federal entitlement programs. Now you may be thinking that this is a boring topic and that you’d rather be reading about pirates or willpower or even sleep. But make no mistake: this may be the most important history book you can read to understand America’s current and future problems.

Alien

Figure 2. Unless aliens invade. Then they can handle all of our fiscal problems.

 

Why is this so important? Because the federal government spends over 2 out of every 3 dollars on entitlements and will only spend more going forward. 

Since World War II ended, spending on entitlements grew an average annual rate 33% faster than the economy, a jump from $500 being spent per American in 1947 to over $7,500 in 2015. And that’s adjusting for inflation! In fact, “entitlements have accounted for all of the growth in federal spending as a percent of” our national economy. “The chronic deficits produced by these excesses have caused the outstanding public debt to rise to about $40,000 per U.S. resident in 2015” – more than 4x the debt per citizen in 1965 in today’s dollars.

 

How did this happen? John Cogan relays the pattern:

“When first enacted, entitlement laws, for policy or fiscal reasons, confine benefits to a group of individuals who are deemed to be particularly worthy of assistance. As time passes, groups of excluded individuals come forth claiming that they are no less deserving of aid. Pressure is brought by, or on behalf of, excluded groups to relax eligibility rules. The ever-present pressure is magnified during periods of budget surpluses and by public officials’ imperative to be elected and reelected. Eventually the government acquiesces and additional claimants deemed worthy are allowed to join the benefit rolls. That very broadening of eligibility rules inevitably brings another group of claimants closer to the eligibility boundary line, and the pressure to relax qualifying rules begins again. The process of liberalization repeats itself until benefits are extended to a point where the program’s purposes bear only a faint resemblance to its original noble intentions.”

It started at the very beginning, in 1776. The Continental Congress promised that those soldiers and sailors of the Continental Army and Navy injured in the Revolutionary War could expect a pension in tribute to their service.

hundred dollar bill

Figure 3. If only the Founding Fathers had been funding fathers.

 

Things quickly grew from there. Over the coming years, Congress expanded the program to include “members of state militias, then to disabled wartime veterans regardless of whether their disability was related to wartime service,” then to practically everyone who fought, regardless of whether they had any disability. And then to their widows – first, only those married during the war, then married before 1800, then ever-married. Then to survivors. And, frequently along the way, the pensions got bigger.

Turtle

Figure 4. The federal government eventually drew the line at pets.

 

In 1819, when the program was still confined to veterans, “the number of applicants exceeded the entire number of Continental Army veterans who were thought to be still alive.” This prompted John Quincy Adams to comment “Uriah Tracy, thirty years ago, used to say that the soldiers of the Revolution never died—that they were immortal. Had he lived to this time, he would have seen that they multiply with the lapse of time.”

Zombie Soldier

Figure 5. The demands for payment in brains prompted the discovery of the Zombie Crisis of the early 19th century.

 

Feeling somewhat guilty, Congress proposed a means test but did not want to insult veterans by requiring proof. So the law simply stated that the pensions were for those “in need of assistance from [their] country for support.” The only time the program was curtailed was in 1820 when budget cuts compelled Congress to require recipients to swear an oath of poverty. The vast majority of pensioners did so – and any that did not had all their benefits restored two years later when Congress had a surplus. 50 years after the war ended, at a time when adults could expect to live to 60, the costs were still growing. But hey, maybe the vigorous exercise of soldiering extended life.

One other foreboding note: Army pensions were paid from general taxes collected by the federal government but the Navy pensions were supposed to come from the sale of goods seized from pirates and enemy ships. The original idea was that the money would be in a protected account and that the pensions would slowly draw from it. But in especially good raiding years, Congress got excited and generously voted to give surpluses away – including retroactively. One Navy widow received the equivalent of $600,000 in today’s currency. Simultaneously, Congress opted to invest half of the Navy pension in a supposedly high-yield fund controlled by political cronies. While promising 3x returns, the fund went bankrupt. Too generous in awarding benefits, too corrupt in investing the principal, Congress was forced to bail out the fund with general tax revenue – all the while claiming that the program was in good shape.

Yacht

Figure 6. Pirates proved the financial model for at least workman’s comp. Maybe the secret to solving our budget woes is declaring war on Carnival Cruise Line.

 

By the time the Revolutionary War pensions were (mostly) off the government books, the Civil War was on – and the pension escalation, despite the benefit of hindsight, followed a similar path. As is the case with practically every government program, and especially those covered in this book, Congress vastly underestimated the cost – in one expansion, its prediction was off by more than 10x in the first two years. By 1896, Civil War pensions were 40% of the federal budget – despite excluding Confederates. You might say “Well, to the victor go the pensions” but Confederate widows were eventually included – in the late 1950s! We still had a 2017 payout due to a 78 year old Civil War veteran marrying a 28 year old in 1924. Their daughter, born in 1929, was the recipient of promised survivor benefits.

Importantly, Civil War pensions were the first to become politically charged. “Vote as you shot” was the slogan of a dominating Republican Party that won 10 out of 12 presidential elections between 1860 and 1912 – and expanded Civil War pensions the whole merry way. The Grand Army of the Republic was America’s first real lobbying organization, consisting of Civil War veterans across the country ready to clamor for benefits. And the government allowed claim agents to help veterans secure their pensions – agents who themselves quickly became a powerful (and corrupting) lobby for new and more distributions they could profit from.

Vote

Figure 7. The massive success of that campaign slogan inspired others. Among free traders, “Vote as you bought.” In Baltimore, “Vote as you squat.” In Chicago, “Vote as you rot.” 

 

The two presidential elections the GOP lost were in large part due to public anger about pension abuse. A report in the late 1870s suggested over 25% of the claims were fraudulent. In one election, Republicans expedited claim approvals in the swing state of Ohio, sometimes in exchange for a vote promise. When the general program was not sufficiently generous, veterans turned to their legislators to get what they wanted in individual pieces of legislation: in one two year period in the 1880s, 40% of all House bills and a majority of all Senate bills were designed to help individual Civil War veterans.

Grover Cleveland was fed up with pension abuse, campaigned against it, and, fighting a pension-happy Congress, ended up being the President with the most vetoes ever. He explained every one in detail: One pension supposed to help a disabled war veteran was vetoed after Cleveland discovered the veteran was injured falling off a swing well after the war. But after only one term, the GOP came roaring back — and restored all the benefits Cleveland had denied while controversially promising even more. Cleveland then became the first and only president ever to lose office and then come back to win a second term. But, learning his political lesson, his second term ended with more pensioners than when he entered. The first executive to fight back ultimately lost.

Swing Set

Figure 8. The swing voters turned against Grover. 

 

With World War I, Congress admirably attempted to learn from past experience and implemented two programs designed to curb future costs. First, as usual, Congress guaranteed a pension for those injured in the war but, differently this time, provided the opportunity for all soldiers to sign up for insurance if they became disabled for any reason after their service was up. Second, Congress gave a certificate to soldiers entitling them to money in 1945, when they might require old-age assistance (though the average soldier would only be in his fifties – and they couldn’t predict what costs 1945 might bring).

The insurance program was popular – until soldiers left service and the government no longer could automatically deduct premium payments. “Ultimately only 10 percent of soldiers who had made regular premium payments during the war continued to do so afterward.” Instead, per usual, Congress expanded the pensions to include veterans with disabilities unrelated to war efforts (and then, predictably, to relatives who had not served themselves).

The old-age assistance program proved to be one of the most controversial programs of the Great Depression. As money continued to grow in the account designed to pay out the benefits, there was immense pressure to spend it. Even in the roaring 1920s, Congress tried to give it away multiple times only to face President Calvin Coolidge’s vetoes. But Congress did manage to slip in the opportunity for veterans to borrow against the value of the certificate.  As the Great Depression took off, over half took advantage.

Meanwhile, a “Bonus Army” of veterans engulfed DC and demanded that, in light of economic conditions, they should receive their 1945 payment early – never mind that the money wasn’t there. President Herbert Hoover reasonably refused, but then violently broke up the protest in a publicity nightmare.

Through this, an unlikely budget cutter emerged: Franklin Delano Roosevelt. Despite being helped in his election by outrage over Hoover’s handling of the Bonus Army, FDR wanted not only to ensure that no early payouts occurred but also to reform the disability pension program which was costing over a quarter of the federal budget. Controversially, “He shared the founding fathers’ belief that all citizens had an obligation to serve their country in wartime and therefore did not represent a special class of individuals entitled to government benefits merely because they had served during wartime.” Immediately upon taking office, FDR proposed Congress grant him significant power to curb the pensions. This was a heavy political lift which he managed to get past the House but the Senate looked sure to filibuster. Determined to get what he wanted, FDR pushed through the House repeal of Prohibition, a piece of popular legislation the Senate could only pass once they dealt with the veterans’ pension. 

Cogan summarizes the extraordinary legislation the Senate then passed:

“President Roosevelt signed the most consequential legislation in pension history… The law repealed all entitlements to pensions that had been granted to veterans of World War I, the Spanish-American War, the Boxer Rebellion, and the Philippine Insurrection. The entitlement repeal applied with equal force to pension entitlements for veterans who had suffered disabilities in wartime service and to those with disabilities unrelated to wartime service. It applied equally to entitlements for widows and orphans of veterans killed in battle. It also applied to entitlements for veterans currently on the rolls and new applicants. The new law gave the president discretionary authority to set new eligibility rules. He could continue pensions for some or all of the affected veterans if he so chose, but he was under no legal obligation to provide pensions to all veterans who met statutorily prescribed eligibility rules. The Economy Act abolished all of them. Monthly benefits for veterans of all wars prior to the Spanish-American War were reduced across the board by 10 percent. The president could also set new monthly pension levels for all other veterans within the broad guidelines established by the law. The Economy Act prohibited the executive branch’s new rules and monthly benefit levels from being challenged in federal court and specified that the delegation of authority to the president would last two years. Regulations then in effect could be changed only by an act of Congress. For the first time in U.S. history, a large-scale entitlement had been repealed.”

FDR went on to use his power to cut the number of recipients in half and reduced the monthly benefit:

“His principal policy goal was to eliminate pensions for veterans with disabilities unrelated to their wartime service. He largely achieved this goal, at least for World War I veterans. On June 30, 1933, 412,482 veterans with nonservice-connected disabilities were on the pension rolls; a year later, there were only 29,903, all of whom were permanently and totally disabled. The pension entitlement for World War I veterans with disabilities unrelated to war had been all but terminated. These veterans were no longer a special class of people to whom the government was obliged to assist. Overall, the Economy Act’s reduction in the veterans’ pensions program is the largest ever taken in any entitlement program in U.S. history.”

Amazingly, it stuck. Over the coming years, FDR vigorously used his veto power to protect his reforms, going so far as to become the only President in history to deliver a veto message in person at the U.S. Congress, insisting that the nearly $8 billion that had already been spent and $450 million ongoing annual expenditure was more than enough.

And yet, despite all of FDR’s efforts, a hurricane hit Florida in 1936 and killed over a hundred World War I veterans who were working on a government project. Congress immediately passed legislation to distribute the bonus that had sparked all the initial controversy and then overrode FDR’s veto. The veterans would get their bonus nearly a decade early – but the pension reform limiting payments to those originally intended still stood, almost entirely due to the President’s determination.

FDR’s fiscal prudence extended only so far. For the one entitlement he reformed, the rest of his New Deal set America up for significant fiscal and constitutional challenges I’ll explore in my next email.

High cost of good intentions

Figure 9. Click here to buy The High Cost of Good Intentions 10/10, perhaps the most important history book you can read to understand America’s current and future problems.

Thanks for reading!  If you enjoyed this review, please sign up for my email in the box below and forward it to a friend: know anyone interested in America’s entitlement programs? How about history generally?

I read over 100 non-fiction books a year (history, business, self-management) and share a review (and terrible cartoons) every couple weeks with my friends. Really, it’s all about how to be a better American and how America can be better. Look forward to having you on board!

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