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.