There is an inconsistency between Donald Trump’s “I won’t touch your Social Security and Medicare” and his “pro-worker” messaging. The Manhattan Institute’s Chris Pope does a good job revealing this inconsistency. It boils down to: Entitlement programs effectively redistribute wealth from relatively poor and young American workers to relatively rich and old retired ones.
The paper, titled “The Overextended Retirement State,” gives a history of how we got into this mess in the first place. As most messes, it started as an attempt to address a real issue for older urban Americans decades ago. But in the end, we now have a system where most of the government redistribution benefits seniors rather than lower-income people, even though seniors as a group are better off financially than any other age group. Also, not surprisingly, the burden of taxes falls disproportionately on younger people.
Pope explains:
Despite its supposed purpose of redistributing from the better-off to worse-off, the American welfare state redistributes much more to middle-class retirees than it does to the poor.
In 2020, 66% of U.S. entitlement spending went to the 17% of the population aged 65 and older. That age cohort contributed only 11% of U.S. direct tax revenues.
Social Security and Medicare expenditures on the elderly dwarf all other publicly funded welfare benefits. This is partly because Social Security and Medicare beneficiaries each receive substantially more aid than recipients of other benefits. But it is primarily because 88% of seniors are eligible for Social Security and Medicare, whereas only 4% of working-age Americans are eligible for these programs (due to disability). . . .
Most means-tested benefits have very narrow eligibility, often limited to those with disabilities or young children. Fewer than 3% of Americans receive Section 8 Housing vouchers, Unemployment Compensation, or Temporary Assistance for Needy Families. Although most seniors receive health-care benefits from Medicare, Medicaid also funds dental, long-term care, and out-of-pocket medical expenses for low-income seniors. Even though 20% of the population across age groups is eligible for Medicaid, the program still spends more on each senior enrolled because of their much greater utilization of medical and long-term-care services.
Conversely, direct taxes are concentrated on the young. This is especially true of payroll taxes, which are deliberately designed to redistribute from workers to retirees. But it is also true for income taxes, which increase with earnings and therefore weigh little on older age cohorts, who are out of the labor force and finance consumption from assets or pension income. Furthermore, the standard exemption from federal taxes is higher for seniors, while most Social Security benefits are exempt from federal and state income taxes. Many states also have dedicated tax exemptions for seniors’ pension income.
He follows up with lots of interesting data showing that seniors as a group are doing very well economically, and relatively better than younger people. Except on education, their consumption of everything is much higher than that of younger Americans, and so is their net wealth.
It makes a lot of sense considering the development of capital markets and the growth of income in the last 40 years. That means that while the design of our entitlement programs might have made sense when retirement meant poverty for many seniors (but also when life expectancy was shorter), it doesn’t make sense today.
Pope writes:
The magnitude of publicly funded entitlements for the elderly can no longer be justified by a desire to even out resources for people from the time of their highest earnings capacity to the lowest. On average, American seniors now enjoy a higher material standard of living than those in their working careers.
Some younger people might think that we don’t need to reform entitlement programs because, while the system is pretty unfair to them right now, they will eventually be older and will themselves benefit from the unfairness when they retire. But that’s only true if the system is solvent. Which it most certainly isn’t.
If Congress doesn’t do anything, benefits will be cut by 21 percent when the trust fund dries out in less than ten years. Waiting for another ten years to act means that reforms will likely cut benefits, maybe even for retirees, while further raising taxes on workers.
Using debt to pay for all the promised benefits in the future without cutting benefits or raising taxes — the politically easier thing to do — won’t work for those retirees, either, when they face the negative consequences that comes with too much debt likely helped with some Federal Reserve shenanigans.
Pope has a bunch of reform ideas at the end of the paper that would make the programs more progressive and fairer to younger working Americans.
I think that that age-based programs don’t make much sense precisely because of the disparity between younger and older Americans. We need a system that still helps lower-income people, but age isn’t a good way to go about it anymore.
The whole thing is here.
Also, check out my colleague Chuck Blahous’s column in the Wall Street Journal about why Trump’s “seniors shouldn’t pay taxes on Social Security benefits” is a bad idea if paired with no changes to benefits.