But I’ve worked hard and paid taxes all my life

US congressman Paul Ryan wants to "strengthen welfare for those who need it" and "end it for those who don’t". And to hard working Americans that sounded reasonable enough … until some of them realised he might be talking about Medicare and Social Security. How could benefits for people who’ve worked and paid taxes all their lives be welfare?

When Washington Post columnist Robert J Samuelson insisted that Medicare and Social Security were welfare readers were incredulous and offended. As one put it: “Let’s refrain from insulting individuals who have worked all their lives and contributed to the system for 50-plus years by insinuating that [their] earned benefits are welfare.”

Now Paul Ryan is attracting the same kind of criticism. As Dr Bill Thomas put it: "Sorry dude but neither Social Security nor Medicare is ‘welfare. They are social insurance programs that provide pensions and health care to older people who have paid into them their entire lives."

But according to analysis by the Urban Institute, most seniors will receive much more in benefits than they ever paid in contributions. For example, a two-earner couple turning 65 in 2010 with one spouse earning an average wage ($43,100 in 2010) and one earning a low wage ($19,400 in 2010) will receive $800,000 in benefits but will have paid in only $500,000.

At The Monkey Cage, Henry Farrell writes: "Medicare is about as obvious an example of welfare as one could possibly imagine – a program intended to spend government money on providing services to a population that would otherwise be vulnerable".

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SJ
SJ
10 years ago

Don

By conflating two different programs, Medicare and Social Security, you lose some important detail.

Social Security is like a defined benefit pension scheme, where the amount you get back (per year) depends on the amount you paid in (per year). It’s possible to get back more than you paid in, by living longer than the actuarial tables say you should. It’s also possible to get less than you paid in, by dying early.

Medicare is something else entirely. It just pays out whatever doctors and hospitals charge for medical care, and there never was any offsetting charge to individual taxpayers. This is welfare for doctors and hospitals in the US, not for “a population that would otherwise be vulnerable”. There’s no attempt at cost control, and it wouldn’t be tolerated here in Australia or pretty much anywhere else in the world.

Peter Whiteford
Peter Whiteford(@peter-whiteford)
10 years ago

SJ

I think you overstate the differences between the two programs. Social security has a progressive benefit formula with differing replacement rates over different earnings levels – 90 percent, 32 percent, and 15 percent – so that low-wage workers receive proportionately more from their Social Security contributions than average- or high-wage earners.

Having said this, the social security tax is not progressive, but you have to put the lifetime contributions rogether with the lifetime benefits to assess the overall distributional implications of the program. Complicating this is the point you mention – people who live longer (usually the better-off) get more on a lifetime basis than people who die earlier (usually lower income groups). In addition, because initial benefits are effectively uprated by earnings growth (but by prices after people start to receive benefits), there is a redistribution between generations with early recipients getting more than they put in, as Don’s link to the Urban Institute points out.

I’m not sure what you mean when you say about Medicare that “there never was any offsetting charge to individual taxpayers”. There is also a payroll tax for Medicare – 1.45% for both employees and employers – see http://www.ssa.gov/oact/progdata/taxRates.html. The contributions just like social security contributions go into a trust fund – so the contributory principle is the same as for social security.

Having read a fair bit about US social security, my view is that even factoring in the life expectancy effects which favour the better-off, the overall effect of the US social security system is progressive and it redistributes to the poor.

If you think that anything that redistributes to the poor is welfare, then social security is welfare.

I’m also not convinced by your argument that Medicare is welfare for doctors and hospitals. The US health care system clearly needs much more effective cost control and health insurance companies make large profits in the USA and their doctors are very well paid. But individuals do get medical services and poorer individuals are likely to get more than they paid for in their working lives.

In my view , the problem really is what we mean by “welfare” – which I think is one of the points made by Don. In the USA more than here, welfare is a term used to refer to programs for the very poor – many of whom appear to be regarded as undeserving. People like Samuelson are I think using welfare in the sort of way that the Institute of Public Affairs discusses middle class welfare here – any government social program that they are not in favour of.

It was interesting in his column in the SMH last week that Gerard Henderson argued that family payments are not welfare and should not be taken away from the well-off, but that real welfare (i.e. for the poor) deserves rigorous scrutiny.

Peter Whiteford
Peter Whiteford(@peter-whiteford)
10 years ago

The shorter version of what I just said: all benefit systems are a mix of redistribution to the poor (“welfare”) and redistribution across your own life cycle (“social insurance”). what the USA and Australia needs is a sensible discussion of the best mix.

Mark Heydon
Mark Heydon
10 years ago

Some time ago I wondered what contribution rate would be required from someone in Australia in order to purchase the age pension and so set up a very simple model which produced some very interesting numbers. Prompted by this post I updated the model to today’s values.

On the following assumptions
– Ignoring expenses, taxes, means testing and other such complications
– Average of male and female mortality rates from the latest Australian life tables
– 4% real rate of return on invested funds
– contributions made every year on a career spanning age 25 to age 65

someone on AWE ($1,004.10 @ Feb 2011 would need to contribute 19% of their earnings in order to fund the full single age pension from age 65 until death (currently $670.90 per fortnight).
As a comparison, that same person earning AWE would be paying income tax (including Medicare levy) at an average rate of 19.1% on the 2010/11 tax rates.

On this basis, the average earner working and paying income taxes all their lives has paid for nothing but their own age pension.

derrida derider
derrida derider
10 years ago

It’s simple, Peter – in US discourse , “welfare” is anything paid to Those People that is not paid to me, “earned benefits” are anything I get that Those People don’t. Since I’m Good and they’re Bad, welfare is of the Devil while benefits are a sign of God’s grace.

It all stems from that deeply ingrained US Calvinism. I blame the Pilgrim Fathers myself.

desipis
10 years ago

Mark Heydon,

I’m not sure how you’ve done your sums, however when I do the calculations with your assumptions I get a required contribution rate of between 8% and 9%. Which seems to line up well with the compulsory super contribution rate.

Pedro
Pedro
10 years ago

“in US discourse” Apparently the same thinking happens here. My middle class welfare is your helping families doing it tough.

Social security might be a defined benefit scheme, but it is still welfare, even to the extent it involves redistribution across the life cycle.

Victor Trumper
Victor Trumper
10 years ago

DD, wash your mouth out instantly.

Any decent calvinist wouldn’t except any money from the government.

What you are actually speaking about is Hansonism which is popular even amongst those ‘individualistic catallaxians’.

Mark Heydon
Mark Heydon
10 years ago

Yes, desipis, you are right, I have looked at the wrong part of my spreadsheet (0% real return instead of 4%) – the trouble with trying to do something quickly in between real work.

At 4% real investment return it is a 4.5% contribution rate – much more reasonable.

Tel
Tel
10 years ago

Funny that everyone conveniently ignores that the people who paid money into social security were offered a promise of return at the time. Remember those things? Promise, word of honour all that stuff?

You would think by now that any time a government offered a promise to its people, those people would run a mile, and probably if contributions were voluntary there never would have been any contributions… sadly these people had no choice but to pay. Be that as it may, the promise of a return was used as a smokescreen to make the whole episode legitimate, just like the smokescreen of “welfare” is being used as a way to distract people from trying to figure out where the money went, or who lost it all.