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Robert Samuelson

Welfare Junkies

By Robert J. Samuelson
Thursday, March 24, 2005; Page A19

We are a nation of closet welfare junkies, which helps explain why we can't have an honest debate about Social Security. Social Security and Medicare are our biggest welfare programs, but because Americans regard "welfare" as shameful, we've found other labels for them. We call them "social insurance" or "entitlements." Anything but welfare. Democrats and Republicans alike embrace the deception. No one wants to upset older voters. Well, if you can't call something by its real name, you can't discuss it honestly.

Welfare is a governmental transfer from one group to another for the benefit of those receiving. The transfer involves cash or services (health care, education). We have welfare for the poor, the old, the disabled, farmers and corporations. Social Security is mainly welfare. Workers' payroll taxes pay the benefits of today's retirees. The taxes aren't "saved" for the workers' own retirement. There have been huge disparities between taxes paid and benefits received.

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Social Security

Ida May Fuller, the first retiree to receive benefits, in 1940, paid $24.75 and got almost a thousand times that ($22,888.92). In the 1950s and '60s, many beneficiaries received 10 or more times the amount their payroll taxes would have returned if invested in U.S. Treasury bonds and kept for retirees (they weren't). Indeed, most beneficiaries who retired before 2000 have received -- or will receive -- a surplus in benefits over what their taxes would have returned if similarly invested, write Sylvester Schieber and John Shoven in their history of Social Security, "The Real Deal." This surplus now has a present value of almost $16 trillion, says Schieber, head of research for the consulting firm Watson Wyatt Worldwide. (Shoven is a Stanford University economist.)

Naturally, the elderly don't see themselves as freeloaders. They think they've "earned" their Social Security benefits by paying payroll taxes. As Schieber and Shoven note, the term "social insurance" dates to Bismarck in 19th-century Germany. But applying it to Social Security involved much political license. In normal usage, insurance suggests protection against something you don't expect to happen -- a house fire, a car accident. By contrast, most people expect to grow old. Using the "terminology of insurance . . . [was intended] to mask the huge welfare payments being made," they write. People falsely believe they're "only getting what they have paid for." That is even less true of Medicare. In 2006 the Congressional Budget Office expects Medicare to cost $383 billion. Medicare premiums (paid by recipients) pay 12 percent; payroll taxes, 49 percent; general taxes and borrowing provide the rest.

This mass deception may seem harmless. After all, most Social Security recipients have been responsible citizens and productive workers. Why accuse them of living on government handouts? The answer is that today's myths perpetuate unrealistic expectations and prevent honest debate. Americans regard "earned benefits" and "welfare" differently. The first is a right, the second a privilege. In theory, welfare should serve some public purpose and not just enrich the recipients. By admitting that Social Security and Medicare are welfare, we allow relevant questions to be raised. Do all beneficiaries "need" or "deserve" their welfare? Is the cost "unfair" to taxpayers or burdensome to the economy? Have the social and economic conditions that originally justified the welfare changed?

For Social Security, they have. In 1935 Americans 65 and older were 6 percent of the population. They're now 12 percent and by 2030 are projected to be 20 percent. Most Americans can now save for their own retirement, including the cost of health insurance. The Social Security debate ought to involve moral values and economic realities. How generous a "safety net" for the elderly can a decent society afford without overtaxing the young or harming the economy? How can changes be made without being too disruptive? Instead, the debate has degenerated into an obscure technical exercise focused on baffling accounting concepts (trust fund "solvency," "unfunded liabilities").

Despite what you've heard, the real issue is not Social Security's "solvency." It is the total cost to the government of baby boomers' retirement, including Social Security, Medicare and Medicaid (which covers much nursing home care). The real issue is preventing those costs from becoming economically oppressive and politically poisonous. Even if the Social Security trust fund is made permanently "solvent" -- in the sense that taxes cover benefits -- the costs of all federal retirement programs may still become undesirably high. In 2004 Social Security, Medicare and Medicaid were 8 percent of national income. Left alone, they'll reach 14.5 percent by 2030, the Government Accountability Office projects. The CBO has made a similar projection.

If these costs are too high (and I think they are), the only way to curb them is to cut benefits. Neither Democrats nor Republicans want to face that reality. President Bush's proposal for "personal accounts" diverts the debate. To enhance their appeal, he promises to exempt anyone 55 or older (anyone born in 1950 or earlier) from any benefit cuts. Some other proposals lower the exemption to 45 (anyone born in 1960 or earlier). Well, that covers most of the baby boom, which stretched from 1946 to 1964. If the real problem is the baby boomers' retirement costs and you exempt baby boomers from benefit cuts, then by definition you ignore the problem.

On these issues, we can't think straight unless we talk straight. We can't control our welfare habit unless we admit our addiction. Don't hold your breath.

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