This is the scene late each month at the U.S. government's production plant on Townsend Road in Philadelphia. But neither bullion nor plutonium are produced here - benefit checks are. The Townsend Road facility prints and distributes Social Security checks for all who received their numbers in the northeastern United States. The roughly 600,000 checks on board each of the rigs are due in beneficiaries' mailboxes within 48 hours. Neither flat tires nor leaking brakes nor collapsing bridges along Interstate 95 will keep these semis from swiftly completing their monthly rounds. Social Security recipients expect their checks and expect them on time; it's a matter of entitlement.
Senior citizens are not alone in awaiting regular government subsidy. So, in one form or another, do farmers, veterans, homeowners, civil servants -nearly every American, in fact, is entitled today to a plethora of social benefits from government as a matter of "earned right." Indeed, our sense of entitlement has become so strong that in the last 15 years the noun "entitlement" has evolved to describe the social benefits Americans feel their government owes them. This is a quantum leap from the Great Depression, or even the sixties, when social workers had to persuade the down-and-out to accept a helping hand from government.
Republicans correctly target a culture of dependency in American society. But they deceptively imply that this culture is confined to a small segment of poor welfare recipients. In fact, dependency on government handouts touches all sectors of society, particularly the middle class. Unless Americans - led by their elected representatives - begin to wean themselves from this middle-class welfare state, Newt Gingrich's vision of individual responsibility will remain a pipe-dream. Even worse, the United States will face an economic crisis of such staggering proportions that it will absorb much of the earnings of future generations.
Roughly speaking, entitlements are benefits that the government automatically distributes, without budgetary limits, to citizens eligible on the basis of their membership in some legally defined group or class. Some beneficiaries, like recipients of Social Security, disability insurance, and unemployment insurance, only collect if they have previously paid certain taxes; others, mainly veterans, qualify through service. Some, such as farmers, benefit by virtue of perceived contributions to the national interest. And a distinct minority of Americans qualify for certain means-tested entitlements simply because they are needy. Altogether, some 400 programs qualify as entitlements.
Today, slightly more than 50 percent of all U.S. households have at least one member who is receiving a direct entitlement benefit from the federal government, such as a veteran's pension or disability payment. Such families collect on average more than $10,300 a year in benefits, which adds up to a total of $750 billion, or more than half of the total federal budget.
At any given time, 30 percent of the U.S. population is also receiving indirect benefits through loopholes in the tax code. A prime example is the home mortgage deduction. Rather than subsidizing homeownership by mailing a check to everyone who borrows to buy a home, the government allows home buyers to write off mortgage interest costs on their income tax returns. The result is an entitlement that pays 27 million homeowners an average of $1,900 a year, dwarfing all other federal housing programs.
Altogether, the mortgage interest deduction and other tax subsidies to individuals cost more than $354 billion in 1993. (By comparison, tax subsidies to corporations, including all depreciation allowances, came to "only" $47 billion, according to the General Accounting Office.) The total bill for entitlements thus comes to well over $1.1 trillion each year. If all of this were going to welfare mothers, the inner cities would be full of Leona Helmsleys. In fact, poverty programs consume only one of six federal social welfare dollars; in 1990, only 25 percent of federal entitlements went to families earning $20,000 or less.
The big rigs pulling out of federal check-producing factories, like Townsend Road's, head largely for suburban, middle-class destinations where the real handout junkies live. You, dear reader, are very likely one yourself. According to recent estimates by the Congressional Budget Office (CBO), in 1990 nearly 30 percent of all veterans' benefits went to families with incomes above $50,000; so did nearly one-fourth of all unemployment benefits, about one-third of all federal civilian pensions, and more than half of all military pensions. More than 40 percent of the USDA's farm payments, meanwhile, were handed to farmers with net worths greater than $750,000.
Entitlements conveyed through the tax code are even more heavily skewed in favor of the middle class and the well-to-do. Consider, for example, the child-care credit, which cost the government more than $3 billion in 1991. Households with incomes below $10,000 received virtually no benefit from this tax subsidy. Those with incomes above $50,000, however, received $1.2 billion to help pay for nannies and other child-care expenses.
This same irony - the more you earn, the better you make out-applies to those using government help to purchase a home. According to Congress' Joint Committee on Taxation, the average value of the mortgage interest deduction for taxpayers with incomes over $100,000 was $3,469 in 1991. The same deduction was worth an average of only $516 for taxpayers in the $20,000 to $30,000 bracket who qualified to take the benefit - and of course many of those taxpayers, including renters and those who couldn't afford tax lawyers, did not.
Once middle-class Americans reach age 62 (now the most common age to begin collecting Social Security), they really start to cash in. As Eugene Steuerle and Jon Bakija have calculated in their recent book, Retooling Social Security for the 21st Century, a typical, middle-class couple retiring at age 65 in 1995 can expect under current law to receive Social Security and Medicare benefits with an annuity value approaching 500,000.
Many retirees argue that they are simply collecting what is rightfully theirs. Actually, the amount of their previous contributions is insignificant compared to the benefits that they collect. A typical retired couple today has paid, in today's dollars, little more than $57,000 in Medicare taxes over their lifetimes, and just over $100,000 in Social Security taxes.
The magnitude of federal spending flowing to middle- and upper-class retirees is so huge that it has transformed vast regions of the country (and fueled the cruise industry, too). During the seventies and eighties, as federal entitlement spending exploded, the Sunbelt boomed. Each month, the government infuses Florida with roughly $3.5 billion in entitlements, without which few retirees could afford to retire as early, or spend as much, as they do. A typical 80-year-old now consumes 16 percent more than a typical 30-year-old, according to one recent study. In the early sixties, by contrast, the average 80-year-old spent just 65 cents for every dollar a 30-year-old used.
But Congress isn't holding hearings on why the middle class can't shake its need for handouts. Like other sources of dependency, entitlements breed their own sustaining myths and deep-seated denials. The businessman calls four martinis at lunch "social drinking," but thinks every pot-smoking student is a craven druggie. The prosperous retiree calls Social Security benefits far in excess of what he paid in taxes "social insurance," but thinks food stamps for poor children is just a corrupting dole. Entitlements, like drugs or alcohol, breed a willingness to act as if the future simply does not exist. Unfortunately, the middle-class entitlement binge is about as sustainable as a crack habit.
Read the Warning Labels
The government hasn't taken to airing public service announcements about the impending collapse of Social Security, Medicare, and other entitlements, but it has issued plenty of official warnings about its inability to keep the checks flowing indefinitely. These warnings are worth reviewing.
* Medicare: The latest actuarial projections show Medicare's main Hospital Insurance (HI) program going broke in 2001, and Medicare's Supplementary Medical Insurance program (SMI), which pays for doctors visits, also heading toward insolvency. [See "The Insatiable Entitlement," page 23]
* Disability Insurance: Thanks largely to a definition of disability loose enough to include stress disorders and alcoholism, the Social Security Administration's Disability Insurance Program is also careening toward insolvency. The latest trustee report projects that the Disability Insurance trust fund will be exhausted by the end of 1995 and urges Congress to divert resources to bail out the program.
* Civil Service Retirement System: The total present value of benefits promised under the system now exceeds $1.1 trillion. No real reserves exist to defray this cost. Today, this encumbrance is roughly equal to $4,600 for every man, woman, and child in the United States.
* Military Retirement System: The retirement age for military pensions is so young, and the benefits so rich, that the average officer leaving the service this year at age 42, with 20 years of experience, can expect to receive over $1.1 million in pension checks before reaching age 65, and another $1 million by age 75. As a result, the present value of benefits already promised by the system comes to more than $738.8 billion, or nearly $3,000 for every American man, woman, and child.
* Veterans' Benefits: Due to the rapid aging of the veterans' population, and to the ever-looser connection between veterans' benefits and actual war experience, the cost of veterans' benefits continues to hit new records. The Department of Veterans Affairs estimates that the present value of its liability for entitlements promised to ex-servicemen and women totals more than $190 billion.
* Private Pension Subsidies: The federal government's Pension Benefit Guarantee Corporation (PBGC), which insures traditional, defined-benefit private pension plans, estimates that it is now "reasonably possible" it will get stuck with $12 billion in liabilities for bankrupt plans in the near term. Studies that look further into the future have estimated that the present value of the foreseeable PBGC deficit exceeds $35 billion, and many critics see a crisis on the horizon that will rival the cost of the savings and loan bailout.
* Social Security Pension Fund: The system's actuaries show the fund running huge deficits after 2013, as baby boomers reach retirement age. Even with optimistic assumptions about future rates of economic growth, the actuaries see no hope of solvency beyond 42 years without huge tax increases.
To sustain just the pension and disability programs would require revenues equivalent to one out of five dollars earned by workers in 2030. Add in the cost of Medicare, and the tax burden on the next generation rises to 32 percent of payroll in 2030, and to over 50 percent by 2070.
The future of entitlement programs as a whole is actually bleaker than the projections for individual programs suggest. Within nine years, according to a recent projection by the CBO, entitlements will consume two-thirds of all federal spending. According to President Clinton's Bipartisan Commission on Entitlement and Tax Reform, outlays for entitlements (not including tax expenditures) and interest on the national debt will consume all tax revenues collected by the federal government within 16 years.
Imagine such a world. You would pay even higher taxes than you do today, but the federal government would still have no money to police our borders or collect customs, no funds for FBI agents, for courts, for medical research or even for an army the size of Luxembourg's. The federal government's sole role would be to collect taxes, distribute entitlements to certain favored groups, and pay interest on the exploding national debt.
It gets worse. The Commission projects that spending for Medicare, Medicaid, Social Security, and federal employee retirement programs alone will consume all federal tax revenues by 2030. This would leave the federal government with no role except subsidizing old people, providing health care for the poor, and paying interest to bond-holders.
These projections are echoed by the annual warnings published by the White House since 1991 in its analyses of the federal budget. The most recent analysis concluded that if current trends in entitlement spending and federal borrowing continue, today's toddlers will pay fully half of what they earn during their entire lives in taxes, and children not yet born may pay as much as 82 percent, not counting their contributions toward their own entitlements.
In sum, it is the official position of the U.S. government that current policy, extended indefinitely, will result in the near-total confiscation of the income of today's younger Americans and future generations. As Alice Rivlin, director of the Office of Management and Budget, noted in her notorious "Big Choices" memo to President Clinton last October, if the government tried to push costs still further info die future, it would run annual deficits exceeding $1.4 trillion by 2020, and $4.1 trillion (or 10.4 percent of the GDP) by 2030.
For saying so, Rivlin was lambasted by Republicans and reprimanded by Democrats, a response typical of the political terror aroused by the subject of entitlements. The Entitlements Commission found efforts to reach consensus on reform solutions so contentious that it disbanded without offering suggestions. The Commission did call for middle-class sacrifice; President Clinton responded with a middle-class tax cut. Bob Kerrey, the Commission's chair, and others have vowed to fight for entitlement reform, but they lack the political capital to do so. In Congress, the notion that Social Security could be on the table for cuts was enough to block the Balanced Budget Amendment. Republicans have alluded to trimming Medicare without saying how they will do so, and they have made only vague references to reducing farm subsidies. Home mortgage deductions, veterans' payments, and federal pensions have merited barely a whisper.
There is, however, a silver lining to the looming entitlement crisis. The problem is so large that even politicians cannot ignore it indefinitely. Entitlements must be cut. The only questions left are when and how.
A Global Solution
Overhauling the welfare state so it is sustainable and once again serves public purposes will entail enormous changes, including rethinking which entitlements ought to be preserved and which eliminated. And since health care entitlements account for nearly one-third of direct entitlement spending, wholesale restructuring of the U.S. health-care system remains essential.
In the meantime, however, we can make our welfare state much more equitable, and free up the resources we need to cut our fiscal deficits, by acting on a simple if far-reaching principle: One's benefits should be proportional to one's need for subsidy, whether the subsidy comes in the form of health insurance or a crop support payment, a mortgage-interest deduction or a Social Security check.
Here, in brief, is how this could work: Families with incomes below $40,000 would be exempt from any reduction in benefits. But more affluent families would see the value of their total entitlements reduced according to a graduated scale: Those with total incomes between $40,000 and $50,000 would lose 10 percent of any entitlements that caused their income to exceed $40,000. For each additional $10,000 of total income, the effective tax rate on benefits would increase by 10 percentage points, up to a cap of 85 percent of benefits for those making $120,000 or more
Under this formula, for example, a family who received $15,000 in Social Security benefits and $30,000 in non-entitlement income would lose $500 of its benefits. Meanwhile, a family that received $15,000 in Social Security and $120,000 or more in non-entitlement income, would lose $12,750 of its Social Security benefits.
How much money might this plan save? In an April 1992 article for The Atlantic Monthly, entitled "The Next New Deal," Neil Howe and I sketched out a proposal for a "global means test" that, had it been enacted at the time, would have saved $149 billion over five years. The CBO, recently analyzed and scored the idea, applying the formula to the following programs: Social Security, Railroad Retirement, unemployment compensation, veterans' compensation and pensions, AFDC, SSI, Food Stamps, Medicare, and Medicaid. For the last two of these programs, the CBO calculated their insurance value minus any premiums paid by individuals. Had such a plan been put into effect on January 1, 1995, it would have saved $9 billion this year and $190 billion by the turn of the century.
Even greater savings could be realized by applying the global means test to entitlements conveyed through the tax code. For example, just limiting the total amount of mortgage interest that a high-income family can deduct to the average write-off taken by families in the $30,000 to $50,000 bracket would save more than $30 billion a year.
Any means test can be difficult to administer. A virtual industry has sprung up to advise Americans on how to disguise assets in order to qualify Grandma or Grandpa for Medicare-financed nursing home care. But a global means test can be achieved exclusively through tax returns, much as we now handle the limited taxation of Social Security. Each filer would be required to list all benefits received, which could be checked against federal records. Above certain limits, the total would trigger a "benefit-withholding" liability, which the filer would send back to the IRS along with any outstanding income-tax liability. As a practical matter, federal benefits could be withheld just as wages are withheld, based on a tax-filer's previous financial experience.
Means-testing is not politically easy, but it is politically feasible. No benefit group is singled out for sacrifice; rather, a global means test treats all Americans according to their individual circumstances. This is untrue of most other reform proposals, such as cutting cost-of-living adjustments across the board. For a widow receiving no income other than one large Social Security check, a COLA may be essential to keep food on the table. For a triple-dipping federal pensioner receiving the minimum Social Security benefit, that same COLA may be just enough to cover the annual rise in greens fees at the club.
Conservatives claim that means-testing Social Security and Medicare would amount to "punishing success." Are the giant windfalls that retirees collect legitimate fruits of their success? Hardly. The real issue is how much government should subsidize the successful and how much younger and poorer people must sacrifice to meet the cost.
A global means test is a significant start to entitlements reform, but it is no panacea. Applied only to Social Security and other direct entitlements, it will not, by itself, be sufficient to close the nation's long-term structural budget deficit, which the CBO projects will start going back up in 1996. In an aging society, moreover, there are ever-tighter limits on how much new debt can be shoved off to the next generation without creating impossible hardships. Long gone are the days when, thanks to tens of millions of Baby Boomers joining the work force each year, entitlements could be expanded without increasing taxes. Worse, those Baby Boomers will soon be retiring instead, and any benefits they receive will come at the direct expense of the comparatively small and downwardly mobile generations that follow. In the post-war period, membership in the middle-class was, for many Americans, an entitlement. In the next century, it will be an accomplishment.
The Yuppies' Dirty Little Secret
You know the type. You're both roughly the same age, you work in equivalent jobs, but somehow he can afford the Acura, the ski trips to Telluride, the summer place on Nantucket; and he appears calm even when discussing college tuition. Call it "The Yuppies' dirty little secret." Baby boomers, economists predict, will receive bequests that will total as much as $10.4 trillion. Many boomers, of course, will receive nothing, and most only a small amount. But for a privileged minority, the windfalls will be massive.
Much of this inheritance money comes from you, me, and everyone else who pays federal payroll and income taxes. The generous entitlements received by middle- and upper-income retirees over the last generation have -enabled them to accumulate and pass on much larger estates than they otherwise would have. This phenomenal windfall suggests another avenue toward entitlement reform: a tax levied specifically to collect that proportion of an inheritance accumulated thanks to government generosity.
Younger generations don't just profit from the leftovers of their parents' hundreds of thousands of dollars in Medicare and Social Security benefits; they also cash in on means-tested benefits like Medicaid's nursing home program. Usually at the urging of younger family members, some elderly persons requiring nursing home care sign over their houses and bank accounts in order to qualify for Medicaid's strict means test. Technically, prospective Medicaid beneficiaries who give away assets to their children are ineligible for Medicaid-financed nursing home care for up to 30 months. But with the help of a lawyer, it's easy to fool the system. The Congressional Budget Office estimated in 1993 that if the government recovered the cost of Medicaid-provided nursing home care from family members who had recently received assets or inheritances from Medicaid patients, taxpayers would have saved $100 million in 1994, $1.8 billion over the 1994-1998 period, and even larger amounts in die following years.
The government could recover those benefits, and more, by applying a "pay-after-you-go" principle to the Medicaid nursing home program and all other federal entitlements. In effect, this would mean that if you wound up collecting, say, 300,000 in Social Security and other entitlements over your lifetime, then the federal government would require that your heirs pay at least as much in a special inheritance surtax when the time came.
Besides fostering greater class equity, this approach would enable current recipients to avoid sacrificing promised subsidies already included in their retirement plans. The proposal might also help reduce overconsumption of health care among the elderly. I'm less likely to stand by while my father receives unnecessary surgery if I know that my inheritance will be reduced dollar for dollar by any hospital bill Medicare pays.
The pay-after-you-go proposal does have its problems, beginning with administration. Where there are lawyers to be had, there are loopholes to be found. At a time when America desperately needs to increase its savings rate, the plan would also take away one of the major incentives people have for accumulating assets. The ability to hold out the promise of a substantial bequest to busy or selfish middle-aged children is one way elderly parents' reduce their chances of being abandoned as they decline.
For these reasons, the global means test described in the accompanying article is a sounder, and more important, idea. A means test would be easier to administer, and, applied to income, not assets, would create less of a disincentive to save. But it is worth having pay-after-you-go on the back burner. Looming over the heads of those who would have to pay, it just might prompt more dramatic reform.
The Insatiable Entitlement
The average American retiring in 1967 received $38,000 in Medicare provider payments, despite not having paid a penny in taxes to the program. From the beginning, Medicare has been characterized by this inequity: What we take out has dwarfed what we put in. And three decades after its creation, the program is in jeopardy. All entitlements require serious attention, but fixing Medicare - particularly Supplemental Medical Insurance (SMI) - is absolutely urgent.
Between 1980 and 1994, Medicare spending quadrupled; it now swallows 2.5 percent of the nation's GDP. By 1999, the program will be short $80 billion. By 2020, as Baby Boomers begin to feel arthritic pangs, the Social Security System Trustees estimate that Medicare will swallow 6.5 percent of the GDP. But unless drastic steps are taken, the program will most likely be insolvent long before then.
In large part, the Medicare crisis is attributable to the explosive growth in both medical costs and life expectancy over the past 30 years. Who in 1965 anticipated magnetic resonance imaging or angioplasty, CAT scans or organ replacements? The influx of federal funding through Medicare acted as a disincentive to cost control, accelerating the use of already expanding medical services and procedures. Take intensive care units, of which the United States has more per capita than any nation in the world. Thanks largely to government indulgence, such units are used mostly to prolong life for elderly patients with poor prognoses. More than half of Hospital Insurance benefits - medicare A - are spent in the last three months of patients' lives.
The real crisis in Medicare, though, is in SMI, or Medicare B, which covers physician, surgeon, outpatient, and other non-hospital costs. The program's costs are expected to almost double in the next six years. Retirees offset less than 25 percent of SMI costs, and employers don't contribute to the program at all.
The rising cost of medical services, unlimited malpractice awards, and the conversion of many inpatient hospital services into outpatient ones have exacerbated the problem.
Reining in Medicare B requires immediate cost containment, beginning with a substantial increase in beneficiary co-payments. Those who have more should pay more: Co-payments ought to be increased on a sliding scale according to income. And employers must begin contributing to SMI.
For Medicare as a whole, we can take other measures, including increasing payroll taxes, eliminating employer tax deductions for Medicare A Contributions, encouraging HMOs, and malpractice reform. But even a triumph of cost containment would still leave us with a huge encumbrance on the next generation. To imply, as most politicians have, that short-term solutions are enough is an exercise in the politics of distraction.
The real issue we must decide as a society is not just who pays what for health care, but rather, what health care is. The question is not nearly as simple as it might seem. Health care is an ever-expanding concept.
Two decades ago, for example, an elderly person who became forgetful was thought to be aging, not ill. Today, such a person is likely to be diagnosed with a terminal illness called Alzheimer's disease, and the search for a cure inspires frenzied, government-subsidized competition among researchers and drug companies. Female infertility, 20 years ago, was a condition of women who could not become pregnant after a year of unprotected intercourse. Today, female infertility describes women who cannot become pregnant after repeated in-vitro fertilization and gamete intrafallopian transfer operations costing $8,000 a try.
By keeping sick people alive, good medicine increases the number of sick people requiring care in the population. And as good medicine produces more old people, old people insist on still more health care to keep them feeling young. Americans, having learned what modern medicine can do, are increasingly unwilling to live with the effects of aging.
To control Medicare and the government's other health care programs we need to ask hard questions. Should Medicare pay for liver transplants for 65-year-old alcoholics? Should it pay for the most effective means of removing kidney stones or for any means used by a hospital? Should it subsidize treatments that tend to prolong the process of dying, or put more resources into preventive medicine? The implications may be unpleasant. The decisions are necessary.
Oregon has made an impressive start in this direction in its Medicaid program. It prioritized 700 health procedures, emphasizing preventive care, and by doing so, curbed costs enough to get more than 100,000 additional Oregonians on Medicaid rolls. Only when the whole country applies a similar rationing principle to all health care subsidies, and demands efficiency in their provision, will we truly begin to contain costs and ensure Medicare's viability.
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|Title Annotation:||includes related articles; middle-class entitlements|
|Date:||Apr 1, 1995|
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