Not Old Against Young
But Rich Against Poor
The big problem of the American welfare state is not that the old get too much,
but that the rich do. Americans suppose that social-welfare programmes are about
helping the poor. This is not true. More than 85% of all benefits go to the middle
and upper classes, both old and young. Households with incomes above $100,000 get
slightly more federal money each year than those earning a tenth of that. Programmes
that require some evidence of need make up less than a quarter of federal entitlement
dollars. And of these means-tested benefits, twice as much went to households making
$50,000 or more than to the poor.
Even leaving aside helpful tax breaks (such as the mortgage-interest tax deduction,
which even Bill Gates can claim for the building of his cyber-house, and which costs
the government, all told, $55 billion a year), middle- and upper-class Americans
get the lion's share of benefits. Much of this is unjustified. Although farm-price
supports were reconfigured in the last Congress, Phillip Longman, a welfare-state
analyst, has estimated that America's 30,000 wealthiest farmers take in $50,000 a
head each year. All told, the huge array of farm support costs $16 billion. Ex- servicemen,
rich or poor, are entitled to subsidized food and medical care for life. Scions of
middle-class families get student loans. And anyone daft enough to choose to live
in a place that is prone to hurricanes or floods can qualify for disaster relief,
whatever his income.
If there is widespread resentment about Social Security, it is for the same reason.
Too many people receive it who do not need it, while spending on everyone else is
squeezed - including on the 4m elderly who are officially poor. In 1997, an estimated
$48.1 billion in Social Security benefits will go to households with incomes between
$50,000 and $100,000. Another $15.5 billion - almost exactly what the government
spends on income support for families on welfare - will be sent to households with
incomes of more than $100,000.
Meanwhile, the 12.4% payroll tax that funds these payments hits the struggling
much harder than the prosperous. The tax starts with the first dollar earned and
stops at $65,400: thus a waitress making $20,000 pays on every dollar earned, while
an executive making $200,000 pays on less than a third of her income. And while the
payroll tax is higher than ever, the rate of return today's worker can expect is
lower. Steve Goss, the chief actuary at the Social Security Administration, estimates
that if the income limit on the payroll tax were lifted, two-thirds of the projected
actuarial deficit would be eliminated.
The advisory council on Social Security, however, did not dare touch this issue.
The conventional wisdom is that making Social Security more progressive would mean
losing the support of the wealthy. Like social Security, the Medicare health programme
for the elderly is also financed through a payroll tax, which ironically is paid
in part by the 20m or so Americans who work full-time and have no medical coverage.
Medicare also spends lavishly on people who could do without it: more than $20 billion
a year goes to households with an income of more than $50,000. Another third goes
to treatment in the last year of life, much of it necessary only to avoid lawsuits.
At least Social Security benefits are taxed, up to a maximum rate of 85%, for
wealthier households. But even elderly Rockefellers are not taxed on their Medicare
benefits. A Republican effort to increase premiums for high-income recipients was
shot down last year by the Democrats. It was not a pleasant sight to see the mostly
middle-class grey lobby dancing in outrage over the stinginess of a projected 6.2%
increase in Medicare spending (despite record deficits), while health-care and nutrition
services for low-income mothers and children were cut.
Although it is fashionable to decry social spending, it helps to blunt the harsher
edges of a highly competitive economic systems. Benefits such as food stamps and
housing vouchers lifted some 27m people above the poverty line in 1995; Social Security
does the same for many others. The fact that more than 30m Americans are poor is
due in part to personal failures, and in part to circumstance. But some of the reason,
too, is that social spending is misdirected. In a society as rich as America's, it
is no wonder that a welfare state that spends almost nine out of every ten dollars
on the prosperous does not find enough for the needs - and is going broke to boot.
(Excerpt from The Economist, January 11, 1997 edition)
Copyright © 1996. The Light Party.