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Is Social Security Middle-Class Welfare?

Thursday, March 10, 2011

It once was, but isn’t anymore, and therein lies an important tale.

I like Robert Samuelson’s work and he’s a huge net plus in moving the country toward some sort of rational and sustainable budget policy, but is a recent column—arriving with the unsubtle title of “Social Security is middle-class welfare”—on the mark? I think not, and explaining why might illuminate a few things about what is and isn’t causing Social Security’s financial problems.

But let's first begin with Medicare since that program, I’d argue, is middle-class welfare in that people retiring today will receive far more in benefits than they ever paid in taxes. As I calculated here, a typical person retiring today paid around $65,000 in Medicare taxes over his lifetime but will receive around $174,000 in lifetime benefits, with all figures calculated to include interest. The excess of Medicare benefits over taxes—around $109,000—can reasonably be called middle-class welfare. It’s benefits they’re receiving that they didn’t pay for and clearly we can’t go on doing that for very much longer.

Social Security is different. A typical couple retiring today will receive lifetime Social Security benefits worth less than the taxes they paid; around 7 percent less on average, totaling a net tax of around $21,500. So if even today’s retirees are receiving less than they paid in, how is this program going broke? Shouldn’t it be running a surplus?

The problem with Social Security isn’t that it’s welfare to the middle class of the future; it’s welfare to the middle class of the past. Until recently, Social Security was a very good deal for most participants and an insanely good deal for others. When a pay-as-you-go program like Social Security starts, it can pay benefits to people who didn’t pay into the program for very long. These folks make out like bandits. Moreover, Congress has increased benefits over time, sweetening the pot even more.

Biggs 3.9.11

As the chart above shows, throughout much of Social Security’s life the net tax rate paid by the average participant was negative, meaning that they received more in benefits than they paid in taxes, even after accounting for interest. For someone retiring in 1950 Social Security was like receiving an extra 3 percent in lifetime earnings; for someone retiring in 1972, the true sweet spot, Social Security was like getting a 6 percent boost in lifetime income. That’s huge. If you want to know why Social Security was so popular, that’s the reason. (The data for the chart are derived from a paper by Ron Lee of the University of California and his co-authors in the journal Population and Development Review. The Social Security Administration’s Dean Leimer has done similar work.)

The problem, of course, is that government hasn’t yet mastered the trick of manufacturing money, meaning that if early generations received more than they paid in, later generations—you guessed it!—must receive less. A lot less. So Social Security is the opposite of all things to all people: a rotten deal for those taking part, yet still going broke and threatening to take the federal budget down with it.

But there is one redeeming aspect of all this: you can stop resenting your grandparents, who aren’t the “greedy geezers” they’re made out to be—at least as far as Social Security is concerned—and start resenting your great-grandparents, who got the super deal that’s leaving both you and the federal budget in the hole. Moreover, since your great-grandparents are likely long dead, they couldn’t care less anyway.

Andrew G. Biggs is a resident scholar at the American Enterprise Institute.

FURTHER READING: Biggs also asks whether government workers are “The Protected Class?” answers “Why Does Government Grow and Grow and Grow?” and describes Social Security proposals as “America the Progressive.” His scholarly work discusses “Are Federal Workers Overpaid?” ways of “Comparing Federal and Private Sector Compensation,” and offers “A Guide for Deficit Reduction in the United States Based on Historical Consolidations That Worked.”

Image by Darren Wamboldt/Bergman Group.

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