By Merton C. Bernstein, Coles Professor of Law Emeritus, Washington University; a founding board member of the National Academy of Social Insurance who served as the principal consultant to the National Commission on Social Security Reform (1982-1983).The bottom line is that cutting entitlements, as some advocate, would hurt business. At a time when the economy is under severe stress, shrinking a system that helps millions and bolsters the economy would be catastrophic. Those peddling benefit cuts make "entitlement" a bad word. They try to evoke pictures of arrogant, lazy, lay-about recipients who believe the world owes them a living. In truth, "entitlement" refers to a program in which claims must be determined by law rather than an official's discretion. In an earlier day, private charity or public relief focused on the "deserving poor." Selection of the "deserving" was subject to the "discretion" of those dispensing largesse and thus subject to abuse and exploitation. Deciding who received help very often turned on race, religion, politics or "character" of an applicant.
Entitlements Boost Consumer Purchasing Power -- Good for BusinessThe economy would be far worse off if "entitlement" programs did not continue to put billions of dollars into the hands of consumers, thereby bolstering business. Consumer purchasing power drives roughly two-thirds of the American economy. Entitlements supply a substantial chunk of it. In fiscal year 2008, Social Security paid 51 million recipients benefits totaling $607 billion, most of it quickly spent. (A small portion goes to income taxes which are recycled into the Social Security Trust Fund.) As the economy contracts, Social Security benefits grow and become an even larger and more important portion of consumer income. Other entitlements like Medicare, Medicaid and Workers Compensation help those needing medical treatment and also fuel the nation's largest employer - the health care industry, supporting businesses from Johnson & Johnson ( JNJ)to Kaiser Permanente ( symbol)to Pfizer ( PFE) and hospitals and other care providers.
Social Security and Medicare Are EarnedEligibility for Social Security benefits and Medicare protection are "earned rights" derived from prescribed periods of covered work and payment of mandated contributions. Some employers consider program payroll contributions as added employment costs. But most economists regard them as part of employee compensation which, absent those contributions, would make pay commensurately higher. Social Security and Medicare have another key protection - they are automatically funded. Medicaid and other means-tested federal and state program benefits, on the other hand, depend on annual appropriation decisions by each state legislature. Medicaid is often the first target for cuts when budget problems arise. Moreover, means-testing increases program cost because determining eligibility takes more time and personnel. So dollar-for-dollar, Medicaid costs some 3.5%age points more than Medicare.
Earned Income Tax Credit (E ITC) Offsets the Double Whammy of the Payroll Tax and the Income Tax on the Low PaidSome sneer that more people make FICA (Social Security) contributions than pay income tax, as if that were some loony federal government mistake. But that is intentional. Policymakers understood the double burden that the income tax and FICA placed on low earners. The EITC was the answer. It rewards work by reducing or eliminating income tax for low earners, but continues the FICA contributions that bolster the "earned benefit" connection. And, by lessening the tax burden for low earners, EITC makes Social Security funding more progressive than FICA's impact alone. So does the Social Security benefit formula. It is weighted so that low and moderate pay produce higher proportional benefits than high pay. Even so, the higher one's average lifetime pay, the more benefits one receives. All of that makes policy sense.
Entitlements Protect the YoungSome Social Security critics complain that old people get more federal support than youngsters. This ignores how much Social Security benefits young people by sustaining their parents and providing dependent and survivor benefits, while the states address their traditional responsibility -- education, with assistance from the feds.
Myth: The Elderly Are WealthyMany are hoodwinked into believing that the elderly are rich, richer than everyone else. Recently, Time columnist Michael Kinsley cited a Federal Reserve report that in 2004 the "average" couple between the ages of 65 and 74 had accumulated wealth of $691,000. That figure was vastly inflated by a small number of extremely wealthy people; the same report showed that couples at the "median" had accumulated $190,000. Singles of those ages did not do half as well. For most people, an owned home is their most valuable property. Since 2004, home values have gone the way of the glaciers. So much for wealthy seniors.
Young and Old Not CompetitorsRegarding young people and their elders as competitors ignores how families function. When young, our parents nurture us. As adults, we support and love our young. Many elderly people care for grandchildren. When we draw Social Security, we are reducing the financial burdens of our adult children. When we work, we pay the payroll contributions that fund Social Security and Medicare; thereafter we go on to the receiving end. This is a family cycle that continues through the generations. Think about Thanksgiving dinners over life spans - everyone contributes what they can, then everyone partakes.
Raising Retirement Age Cuts Benefits; Protection for the Elderly ImperiledOne proposed remedy for benefits that are supposedly too generous is to raise the normal retirement age. People think that means everyone would retire later. It really means that everyone qualifying thereafter would receive lower benefits. If everyone over 55 at enactment were protected from cuts (as usually promised) the young would bear the biggest burdens, making that reassurance to the elderly harder to keep.