Handouts

I made a flip comment on a post at OTB about a Pew poll that found, unsurprisingly, that the support among Americans for Social Security, Medicare, and Medicaid is strong. The comment has earned me a certain amount of ire. I am surprised that reasonably intelligent people actually believe that people over 65 only receive as much paid out in benefits as they paid in in taxes.

It’s not true. The folks over at the Urban Institute, not generally thought of as a bastion of conservative thinking, did a study on this very subject. They found that if you include a 2% real interest rate for the average person lifetime benefits paid by Social Security are on the order of contributions while the benefits paid by Medicare are a multiple of what was contributed. A couple with each partner earning an average wage received in combined benefits about 20% more (including the interest) than was paid in combined taxes.

And that 2% real interest rate is a very rosy assumption. Where will the average person get a 2% real interest rate? Not from a savings account. Those don’t even pay 2% interest these days let alone 2% real interest. Equities? Two problems: first it goes both up and down (by my calculation the Dow has declined about 5% since December 2007) and it has both winners and losers.

And it’s certainly not from real estate at least not any more (as practically any homeowner can tell you).

The only place the average person gets that kind of real interest is from the federal government, i.e. from other people and from borrowing. Right now we’re borrowing a very great deal of that and, even if we rescind the “Bush tax cuts” (something I support) and withdraw our troops from Iraq and Afghanistan (something I also support with caveats), we’ll still be borrowing a great deal of that.

Entitlements are not a return on investment. They’re benefits. They are transfer payments. They’re a handout. And a lot of those benefits are going to ordinary middle income and even wealthy people.

Both Social Security and Medicare are cashflow negative. We’re borrowing to pay them. That means higher interest paid in the future (maybe significantly higher interest). Right now the fastest-increasing of those benefits, Medicare, is increasing in cost at 9% per year while incomes are increasing at 3% a year. That’s a train wreck.