Posts Tagged ‘Welfare State’

‘Entitlements’ and welfare: the difference

December 2, 2014

There’s a big difference, easy to not notice, between “entitlements”, such as Social Security and Medicare, and “welfare”, such as Temporary Assistance to Needy Families.

Social Security and Medicare are paid for through special earmarked funds, which the people who benefit from these programs pay into.  They are different from welfare programs, which are paid for through general tax revenues, mainly the income tax.

Gary Flamenhaft, a guest poster on the Club Orlov web log, has a good explanation of how this works.

Some people criticized my claim about the Tea Party’s reason for shutting down the government: “They thought that the welfare system is bankrupting the country.  This is a laughable claim, because welfare spending looks negligible when compared to military spending.”

They pointed to the $850 billion Social Security program, the $821 billion Medicaid and Medicare program, and the $521 billion in other mandatory programs, calling them “welfare.”

There is just one problem with this critique: none of these programs are funded using the income tax. They are called entitlements, and the way you entitle yourself to them is by paying into them using a special payroll tax. Same goes for unemployment insurance, by the way.

entitlements720All of these are funded using something that is called a tax, but in essence they are joint savings accounts that you hold in common with many other people, with some rules on how the money is then spent on those who have paid into them.

Clearly, the Tea Party doesn’t like these joint savings accounts either.  We still need to distinguish them from “welfare,” or we won’t even know what we are talking about.

If you are not aware of this, the employer and employee each pay half of the payroll tax to the government, although if you are self-employed—lucky you!—you get to pay both halves.  [snip]

If you look at the US budget, on Table S-4 p. 168, you will see the distinction between mandatory programs paid by payroll tax and “appropriated” programs paid by income tax. There may be some overlap, but this gives you a general idea:

  • Subtotal, mandatory programs: $2,234 billion.
  • Subtotal, appropriated programs: $1,174 billion.

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The invisible welfare state

October 15, 2012

Click to enlarge.

Suzanne Mettler, a professor of government at Cornell University, did a survey in 2008 which indicated that the majority of Americans who receive tax breaks or government aid do not think of themselves as benefiting from government programs.

This is partly a reflection of human nature, especially of American human nature.  We Americans like to think of ourselves as self-reliant and independent, so we tend to forget the degree to which we’re not completely independent.  But the chart also reflects the fact that many social programs were designed to hide the fact that they are social welfare programs.

We Americans don’t like to think of ourselves as depending on government.  That is why, historically, the U.S. President and Congress have preferred to use the tax code as a means of social welfare and social engineering.

I am a retiree who benefits from Social Security and Medicare, which obviously are government social programs.  But I also benefit from having been able to put money into Individual Retirement Accounts and defer taxes until I take money out.  It is not so obvious that this is a government social program.

This makes the U.S. tax code very complicated.  But when you stop and think about it, the effect on government is the same if I pay taxes at the normal rate and then receive a grant, or if I receive no grant and a tax reduction for the amount of the grant.

Another reason for tax breaks is the U.S. social policy is oriented toward the middle class, not the very poor.  The 529 and Coverdell programs, listed on the top line of the chart, are means by which families can defer taxes on money saved for a child’s future college education.  In order to benefit, you have to be in a position to save money in the first place.

The same is true of all the other tax break programs.  An accountant friend of mine said many of his poor clients are unaware that they do not pay income taxes.  They don’t distinguished between income taxes and payroll taxes, and they think that their Earned Income Tax Credits are refunds on income taxes.

Social insurance programs, such as Social Security, Medicare and unemployment insurance, are designed to give people a sense of entitlement.  I paid payroll taxes all my working life, and still pay Medicare premiums, so I feel entitled to Social Security and Medicare and would have felt entitled to unemployment compensation if I ever had needed it.

And if I were a military veteran who served in wartime, I would certainly feel I had earned the right to the G.I. bill and other veterans benefits.   I might not think of myself as “benefiting from a government social program.”

Even when you get down to the bottom of the list—welfare assistance, public housing and food stamps—some of the people who use these programs have in better times paid taxes to support them.

So the illusion of not benefiting from government social programs is understandable.  But it is still an illusion.

I couldn’t find a link to Suzanne Mettler’s original 2008 paper, but click on Reconstituting the Submerged State: the Challenge of Social Policy Reform in the Obama Era for a follow-up paper she wrote, which includes the chart.

Click on Who Says They Have Ever Used a Government Social Program? for a recent paper by Suzanne Mettler and Julianna Koch of Cornell’s Department of Government.

If you’re like me and didn’t know what a 529 or Coverdell plan were, click on Coverdell Education Savings Account Vs. a 529 Plan for an explanation by State Farm Insurance.

Click on “Did Anybody Help Me Out? No” for an earlier post of mine about perceptions of social welfare.