Social Security and Medicare Are Already Welfare

We have a basic problem in this country that we are not willing to face.  Over time our retirement programs of Social Security and Medicare have changed from insurance type of programs into Welfare programs.  We have overpromised and underfunded retirement benefits that we cannot afford.  Even these current “fiscal cliff” negotiations, which were supposed to force some tough decisions on the main drivers of our debt, appear to be headed toward postponing hard decisions.  The continual avoidance of dealing with these issues is partly due to the false notion that people paid into these programs, and are entitled to the benefits they are receiving.  They did pay in, but not nearly at the rate they are collecting.  The US government is either the worst insurance company ever, or these are welfare programs.

Any fair analysis must combine the pay in, and benefits of both Social Security and Medicare.  To analyze only the one that is reasonable (Social Security), without the other (Medicare) is completely dishonest, since nearly all seniors are on both programs.  This would be like getting a great deal on your cable and ignoring your lousy internet rates when both are supplied by the same company.  There have been many different studies that look at the pay in and pay out of both programs.  Generally each senior will get back $100,000 – $200,000 more in benefits than they paid in.  The older you are the better your deal, since the current rates of pay into Social Security (12.4%) have only been in place since 1990.  A transfer of wealth like this from taxpayers to beneficiaries is usually defined as welfare.

Medicare benefits are going to be roughly the same throughout the income range once the changes are in place to the drug benefit next year.  There is, however, a skew in Social Security benefits for low end workers.  Namely, those at the low end of the pay scale receive 4x their yearly pay in amount, while those the top end receive 2.6x their yearly pay in amount.  In addition, the program which was originally designed to distribute benefits tax free, now subjects nearly all benefits to income taxes.  This also lessens the benefits for those with higher incomes.  There is no private insurance plan that is set up to discriminate based on income, but this is an element in most welfare programs.

If we want to have a serious discussion about solutions, we need to start speaking the truth about these programs.  During everyone’s working life, they receive a document from the Social Security Administration which shows how much he/she has contributed, and what payout they can anticipate.  This document should add Medicare, and continue to be sent to people after retirement.  Perhaps if the numbers start going negative on retirees yearly forms, they will have a better understanding of the problem.  There may even be some humility on the part of seniors, particularly if they fear they are burdening their grandchildren.  This could be a good start toward appreciating our predicament.

Once people have a proper understanding of the problem, solutions are much easier to discuss.  When Social Security began, average life expectancy was about 65, it is now 78 (http://www.cdc.gov/nchs/data/hus/hus11.pdf#022).  The annual cost of living increase was in 1974.  There are some simple solutions to the problem once the mindset is corrected.  There was a proposal to raise the retirement age by 1 month per year for the next 48 years.  Perhaps add to this raising the eligibility of Medicare by 2 months per year until it catches up to Social Security.  Still allow people to still start on SS at 62, but at an even lower payout.  Even add Medicare at 62, but with higher copays.  Reduce the cost of living increase by 1%.  Even implementing just some of these will extend the solvency of these programs.

People receiving the Social Security and Medicare Bundle are always willing to talk about reductions in Welfare programs, and not the programs they benefit from.  It is not their fault, because they have been told for decades that they are collecting on an insurance type of program that they paid into.  Until we change the understanding of how our retirement programs have morphed into welfare programs, we will not be able to deal with solving these problems.

Author Bio:

Michael has been an editor and contributor at the website www.freemarketsfreepeople.net for over 2 years. He has over 20+ years of diverse business experience, from running complex operations where he managed hundreds of people, to starting and running small businesses such as www.realinterestfund.com. He is blessed, or perhaps cursed, with a logical mind which he uses to analyze government, media, politics, and culture. He believes that his life experiences help him bring a unique perspective to the issues of the day.
  • http://twitter.com/RickLehrman Richard Alan Lehrman

    A great start. Actually, it was Roosevelt who came up with the “entitlement” label, when the program was funded solely by a one percent payroll tax. It was meant to have a positive connotation, in the sense that benefits were tied strictly to contributions. Accordingly, beneficiaries were “entitled” to payments as contrasted to needs based programs politically vulnerable to the pejorative label of “handouts.”

    Further adding to the paradigm of a contributory “entitlement” was the notion that payroll “contributions” would be set aside in a “trust fund” which, in Roosevelt’s words, “no damn politician will ever be able to touch.”

    Like nearly every other government program, however:

    (1) promised benefits have skyrocketed;

    (2) the rate of payroll tax has escalated almost eight fold (i.e., 800%);

    (3) the amount of payroll to which that tax is applied has exploded at an even higher rate;

    (4) the number of people covered has expanded far beyond the original intent;

    (5) an entirely new program – disability – was added which has, over the last four years become a de facto permanent welfare program;

    (6) the benefit formula was changed to a quasi-welfare program in which the incomes of higher earners are replaced at a rate (15%) equal to **one-sixth** the rate of lower income workers (90%), but the higher income workers pay the same rate of tax;

    (7) because the promised benefits have so outstripped the amount of incoming revenues, no worker actually pays even a portion of their own benefits – FICA taxed paid now are used immediately to pay current benefits;

    (8) for the same reason, the “trust fund” has become a contingency reserve dwarfed in magnitude by the amount of promised monthly benefits (if you doubt this, recall Obama’s claim he would be “unable to guarantee” the following month’s checks if the debt limit was not increased despite the existence of the “trust fund;”

    (9) because the promised benefits have so outstripped the amount of incoming revenues, Congress authorized using hundreds of billions of general revenues (i.e., income taxes) in a vain effort to shore up the program, further disintegrating the link between “contributions” and benefits; and

    (10) despite all of this, the unfunded liabilities of the system are in the tens of trillions. Not even the most liberal Democrat advocates another increase in the payroll tax. Any further increases in general revenues (putting aside the fact there aren’t any; we are already $16 trillion in debt) only further attenuates the once solid connection between contributions and benefits – the very thing that originally allowed proponents to say that benefits are “not welfare”

    The bottom line is that currently overpromised benefits are not mathematically sustainable, not by a long shot. You could “tax the rich” at 100% (not even China does this) and still not come close. Conservatives have warned about this day of reckoning for decades. By choosing to kick the can down the road, the effect of the inevitable benefit cuts – or program collapse – will be all the more devastating

  • BenDoubleCrossed

    Michael,

    I have several statements and questions:

    Government determined citizens are too stupid and undisciplined to put back for our old age and with held Social Security from our incomes.

    Did the government wisely set aside funds from our paychecks and invest them to draw interest to offset the cost of payouts on our retirements?

    The price of a new Ford in 1961 was $3,000. A similar car today would cost $35,000 – $40,000. Yet a gallon of gas still contains 128 ounces.

    How can government expect citizens to set back money for our own retirement when interest on money saved does not even keep up with inflation? Why doesn’t a 2012 dollar have the same buying power as a 1961 dollar? Government has failed its responsibility to provide a sound monetary system!

    Yes life expectancy has increased from 65 to 78 years and it would seem prudent to raise the age of retirement to 67 or later.

    But how many older citizens, due to a miserable economy, had to take early retirement at 62 because we were unemployed or under employed beginning in our middle 50s? While our lives are getting longer, employers no longer value the wisdom that comes with age. They are more concerned with how and aging workforce affects the cost of providing health care to their employees.

  • Steve

    All of the politicians that changed Social Security and Medicare into ponzi schemes should be put in a cell with Bernie Madoff.

  • 633

    The writer makes some excellent points. I think however his argument (essentially truth in reporting) could be improved by ending the title “entitlements”-a value laden terminology if ever there was one-and avoiding terms like “Ponzi scheme”or “welfare” -which implies recipients are somehow beneficiaries knowingly complicit in a con, or consumers of unearned federal charity. The term “generational transfer” payment-which is clearly explained on the Social Security web site-alters that moral equation and accurately describes what the program actually has always been (the first recipient contributed $14 and got back $88,000). Simply put the current contributors are supporting prior retirees. As an illustration my contributions supported my parents, my children’s will support me. But neither I nor my fellow Americans had sufficient children to sustain the program. And that-the change in demographics, sexual culture, and family size-is the literal truth for the post baby boom generation.

  • DanB_Tiffin

    I know that a lot of people don’t like to call these programs entitlements. They bring that up a lot. OK, I will now call them “purple cheese” instead of “entitlements” and I will see if the financial facts of either program changes because of that.

  • G. Daylan

    Because Social Security and are Ponzi schemes they can never be made truly solvent. Also, they are sacred to the Democrat party so we can not expect to change them so long as that party holds one house or the presidency. Perhaps the fiscal cliff will wake up enough politicians but that is an extremely long shot. Welcome to Greece.

  • Chris Matthewson

    AARP will try to demagogue this issue, but a clear statement of the facts, as Michael has presented here, is the best antidote to lies and half-truths.

    Thank you.

  • Dboxman7

    The only concern of ANY politician is their own re-election/political survival. Anyone that thinks differently is only fooling themselves. Our lack of term limits, in Congress especially, has created a class of elected royalty. That is how they see themselves, and they act accordingly; “the peasants could not possibly understand this issue so we must think for them.”

  • RickonhisHarleyJohnson

    First, I wish we had never had S.S or Medicare. Having said that – the total my wife and I have paid in during our working lives would be worth 700K at age 62, if we had been left to invest it ourselves. Over 1 million at the rate of return of the DJIA.

    That amount would pay out over 2 and 1/2 times the amount of Social Security; more than enough to cover retiree medical insurance. And we’ve bought medical coverage our entire lives, and without Medicare, would continue to do so ourselves.

    It’s not just a case of expectations because we were told it’s insurance we paid into. We, in fact, did pay into this – a lot of hard earned money! So, I think you may want to take a harder look at your math, Michael.

    Does it need fixed? Absolutely! Privatize would be my choice.

  • Wheels55

    It appears that the style of politicians these days is to procrastinate to avoid having any stink on them and then, when there truly is a cliff, politicians at that time can blame the politicians of the past for not acting. Therefore, it is never the fault of anyone currently in office. I believe the master of this style is Obama.