.

SmartMoney Blogs

Encore
A blog about living in and planning for retirement

They’re Not Moochers and It’s Not Welfare

Alicia Munnell, the director of the Center for Retirement Research at Boston College, is a weekly contributor to “Encore.

Paul Krugman in a recent New York Times Op-ed “Moochers against Welfare” picked up the theme of an earlier front page story “Even Critics of Safety Net Increasingly Depend on It.” Both pieces, in my view, miss the important distinction between social insurance – where citizens contribute on a regular basis to protect themselves against a loss of earnings – and means-tested benefits – where money, food, or housing is provided to people in need.

People who are receiving Social Security retirement or disability benefits, unemployment insurance, or workers’ compensation are correct in not viewing these payments as a handout from the government. Rather they are receiving the proceeds of income insurance for which they, or their employer, paid premiums over their lifetime.

The case of Social Security retirement benefits is the clearest. Workers and their employers each contribute 5.3% of wages annually for Old-Age and Survivors Insurance. This insurance pays benefits to the worker’s family if he should die prematurely and retirement benefits if he survives to age 62. On average, for people retiring today, the payroll tax contributions roughly equal the benefits they can expect to receive. (High earners get a slightly worse deal and low earners a better deal.) Similarly, workers and their employers each contribute 0.9% of earnings for Social Security Disability Insurance, which pays benefits when workers become permanently and totally disabled.

The story is essentially the same for unemployment and workers’ compensation. Even though premiums are usually paid entirely by the employer, economists believe the employer’s contributions are part of the worker’s compensation. Essentially, employers decide how much they are willing to pay in total compensation and then divvy up that commitment between wages and fringe benefits. Contributions for unemployment insurance and workers’ compensation are a component of fringe benefits.

Medicare is a more complicated story for a number of reasons. Only a portion of the program, Part A–Hospital Insurance, follows the same model as Social Security of purchasing insurance through annual contributions over the worklife. Part B–Medical Insurance and Part D–Prescription Drug Insurance are financed by premiums paid after retirement and both receive a subsidy from general revenues. More complicating is the fact that health care costs have increased so rapidly that the contributions do not cover expected benefits. Yet, the intention is for Medicare to function as social insurance. Most people think they are paying for their benefits. And the only way to get deficits under control is for this aspiration to become a reality.

In short, most of what the average citizen receives “from the government” is not welfare. It is the payoff of a lifetime of premiums. Through social insurance, citizens compel themselves to prepare for the loss of earnings from the business cycle, injury, permanent disability, or retirement or to protect their family should they die early.  The government writes the check, but in most cases individuals have paid for the benefits.

Comments

We welcome thoughtful comments from readers. Please comply with our guidelines. Our blogs do not require the use of your real name.

Comments (5 of 13)

View all Comments »
    • I presented a case against the SSI system at the age of 15 in a Civics Class at my local High School. The teacher was upset by my claims against the program. I am now approaching 64 years of age, and many of the claims I made have become reality.
      The most recent Media/Political agendas have been pushing for reviews and changes. I suspect something will change (Unfortunately those who have paid the most will probably lose the most).
      One area that has recently been highlighted is the DI (Disability Insurance) portion of the program. I believe this is funded entirely by Private Sector employees/employers. I would highly suggest that all Public Sector employees be required to pay for this portion of the Human Cost of Government. In addition the US must provide the Actual funding requirements of the DI, and Tax accordingly. I would suspect it is a relatively large portion of the total SSDI monies collected, and I’m sure needed by those unfortunate people with legitimate disabilities. The Public Sector has been taking much from US society for many years, and needs to “Step-Up” and do their part to make everything work as expected.

    • So Richard are you turning down your social security check? More power to you. I will take my check at age 67 and I will NOT be a welfare recipient. I could have saved that much more for my retirement if I didn’t have to pay social security. I would also support a system where half my contribution went to “my” account that the government does not control and the other half went to another account that would be used to support the less fortunate. ~12% of $110,800 (in 2012) is a lot to contribute without any return, but I do understand my duty to help those less fortunate. However, I would much rather that I choose (or a reputable charitable organization on my behalf) those who need extra support (yes, I do contribute a large portion of my income to charity, which % increases as my income increases). We do have a responsibility to be responsible, to teach our children to be responsible, and to take steps to be self-maintaining. And, like others, I don’t agree that a drug addict or most obese people are “disabled” in the sense that I should support them.

    • You can pretend Social Security is anything you want. That’s cool.

      But pretending it’s “Social Insurance” and not “Welfare” is just semantics.

      If you receive SS, go to the mirror and repeat: “I am a welfare recipient” If you can’t live with that, just return your check to uncle sam. Nobody is forcing you to take welfare.

    • Social Security has both minimums and maximums. So it only acts as “insurance” if your contributions fall within a certain window. Outside of this you are either a welfare recipient or provider.

    • This all sounds great help out others. I can tell you of three people right now who do not work, have never held a job longer than a year and are gitting disability right now, all are under 26. One said he had a bad knee the other two are fat, and the government is giving them money. In Yellow Stone Park they say not to feed the bears because it makes them dependant and they can not fend for themselves. It works pretty well for the bears, or should we feed them to?

About Encore

  • Encore examines the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities and priorities of today’s retirees. The blog also explores news that affects retirement, from the Wall Street Journal Digital Network and around the web. Lead bloggers are reporter Catey Hill and senior editor Jeremy Olshan. Other contributors include The Wall Street Journal’s retirement columnists Glenn Ruffenach and Anne Tergesen; the Director for the Center for Retirement Research at Boston College, Alicia Munnell; and the Director of Research for Pinnacle Advisory Group, Michael Kitces, CFP.

.