Friday, October 25, 2013

A thoroughly misleading statistic

Earlier this week the Census Bureau released numbers which I found to be significantly misleading.   The headline stated that 49% of Americans get government benefits.  82.5 million Americans receive Medicaid benefits (that is about one in four).  Almost 50 million receive Social Security payments.  An equal number received food stamps.  46 million get Medicare.  20 million receive SSI.  13 million receive subsidized housing.  5 million receive unemployment benefits.  3 million get Veterans benefits.  And about 360,000 receive Railroad Retirement.  (The chart at the right is from the WSJ)

Here is my problem with the number.   I have color coded two types of programs - those which require a contribution (where the government serves as a bank) and those which do not.  In many cases the programs that are contributory are a horrible deal.  For example, over my career my employers and I contributed almost $350,000 to Social Security and almost $100,000 to Medicare taxes.   If you simply net present valued those contributions my current Social Security benefit would be at least double what I am receiving.  And more importantly I would have a net asset to pass on to my heirs.   Medical insurance would be a lot more expensive but would still provide better benefits if the program were a true contributory scheme.

Some of those programs in black are set up like a risk pool.  So, for example, every wage earner pays a percentage of wage to unemployment insurance.  During my career I never had to use the insurance, but had I been unemployed I could have cushioned the problems of not having a wage while I looked for another job.   But some things that are called insurance are not.  FICA (or Social Security) is called insurance but it is not.   The structure of Social Security where one generation pays for another (thus if the number of contributors begins to be smaller than the number of recipients) is unsound financially but in no way is it insurance.   Many of the problems of these "benefit" programs could be solved by making part of the payments we all make into a savings program and part into a welfare payment for those who have been less fortunate.   That is what places like Chile have done and it immediately put their program on a sound footing.

By confusing the notion of benefits you begin to confuse the basic role(s) of government.  There are now 15 million more people receiving food stamps than there were at the start of the recession and the number continues to grow.  At the same time I am concerned that the rollout of the ACA will increase the recipients of non-contributory benefits.   Clearly, as a society we need to provide for those who cannot provide for themselves.   But we should not make two errors that I believe the stories about the Census numbers do.   First, we should not aggregate the data between programs run by government that are (at least in theory) supported by contributions and those where support for individuals receive benefits without direct contributions.  Second, if we really want to focus on those with legitimate needs then we need to think about ways to assure that those programs which are contributory all the maximum flexibility to the contributors to get the best yield on their contributions.  

Combining contributory and welfare benefits together distorts reality and makes a bad deal for both the contributor and the recipient. If you carry the logic of this statistic to its conclusion then every time I drive on a road, which I pay for with income and gas taxes I am getting a benefit from government.   Government then becomes the creator of all benefits.   That certainly is not a way to advance a free society.

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