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The Good Old Double Reverse

Rep. Ryan Clearly Targets Seniors as He Seeks Taxes Cuts for the Wealthy

SOURCE: AP/Carolyn Kaster

House Budget Committee Chairman Rep. Paul Ryan presides over one of the committee's hearing on Capitol Hill in Washington.

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House Budget Committee Chairman Paul Ryan (R-WI) thinks that the poor deserve more! Well, sort of. In a March 5 column entitled “Government Must Refocus Its Safety Net to Those in Need,” he laments that the bottom 20 percent of households get a lower percentage of “government transfer payments” than they did 30 years ago. He explains:

This shift reflects a growth in programs that focus on the elderly population and are not for the most part income-adjusted, such as Social Security and Medicare. In other words, the structure of some of our largest entitlement programs has decreased the share of government transfer payments going to lower-income households and increased the share going to wealthier seniors.

So it turns out that Rep. Ryan is not so much advocating for the poor as he is advocating for a dramatic retrenchment of the nation’s retirement system—a system that is largely self-financed. Ryan explains:

I find that statistic astonishing. There is something wrong with our government transfer programs if they are increasingly steering assistance to the wealthy.

Wait a minute. Where does the term wealthy come from? Rep. Ryan is right, Social Security and Medicare Payments have grown dramatically since 1979 when there were only 25 million people in America over the age of 65. But are they rich? Recent U.S. Census Bureau data shows that 30 percent of seniors are actually in the bottom 20 percent of all households by income. But what about the rest? A majority of the remainder is in the bottom half of all households—and most of them would be in the bottom 20 percent, too, if it weren’t for Social Security and Medicare, the very programs Rep. Ryan wants to cut.

Here are the numbers. In 2010, the latest year for which complete statistics were available, there were 25 million households in which the householder was 65 or older. Of those 7.8 million or 31 percent had annual household income of less than $20,000. Another 9.8 million or 38 percent of those households had annual incomes between $20,000 and $50,000. The average annual Social Security benefit is $14,760, and the average annual Medicare benefit per enrollee is $11,762. This means about 7 out of 10 people living in elderly households are either in the bottom 20 percent or would be if they lost their Social Security or had to pay their medical costs out of pocket. (See table)

Who relies the most on Social Security in retirement?

But what about the rest? There are about 1 million elderly households with incomes of more than $150,000 a year. That is only about 4 percent of the total, so what would be wrong with whacking their benefits?

The first problem is that Social Security and Medicare were not intended to be safety net programs in the same sense as the Supplementary Nutrition Assistance Program (formerly known as food stamps) or Temporary Assistance to Needy Families. Social Security and Medicare are programs that force everybody to put some money aside so that everyone would have the bare essentials in old age. The more you made the more you put aside—and the more you got in benefits. But as Allan Sloan recently pointed out in The Washington Post, Social Security already is means-tested and the same is true for Medicare.

My method of looking at the numbers is a good deal different from the analysis done by Sloan, but we both come up with a similar result. While low-income Americans will typically get considerably more in Social Security benefits than they (and their employers) have paid in taxes and the accrued interest on their contributions, high-income Americans typically get less—often a lot less. See below for an illustrative example.

What Social Security Means for high-income Americans

Let’s take a baby boomer born right after World War II in 1946. Assume this individual went through college and professional school and started working full time in 1970. We will also assume that this person paid the maximum payroll tax throughout their career and that they are retiring this year at age 66 when they become eligible for the maximum Social Security benefit.

During this person’s career he and their employers would have paid $284,000 in Social Security (Old Age Survivors and Disability Insurance) payroll taxes. In addition, the Social Security Trust Fund would have invested that money over the years in U.S. Treasuries earning during that period $213,000 in interest. Altogether this person’s contributions at retirement would have totaled $497,000.

That would make them eligible for the highest benefit level—this year its $30,156 a year. The Trust Fund would continue to earn interest on their contributions as their benefit payments would gradually reduce the balance. Even though the benefits were indexed for inflation the contributions they made and the interest collected on those contributions would not be exhausted when they reached age 84, the average life expectancy for someone who is currently 66 years old.

But there is more to it than that. In 1983 President Ronald Reagan signed legislation making part of the Social Security benefit going to higher income elderly subject to taxation. In 1993 the portion of such benefits subject to taxation was raised to 85 percent. Revenues raised by that amendment go directly back into the Social Security Trust Fund. As a result, the real benefit for the person in this analysis is about $23,000 a year rather than $30,000. And in the approximately 18 years of life expectancy after retirement, he will use less than $300,000 or 60 percent of his or her contributions and accrued interest paid into the system.

So it turns out that Rep. Ryan’s “transfer” payments to the “wealthy” turn out to be either:

  • Not transfer payments at all but simply seniors collecting money they paid into the system.
  • Not wealthy people at all but people who might well be in the bottom 20 percent of households themselves if it were not for these benefits that Ryan is objecting to.

Rep. Ryan is right that we need to do more to help the poor of all ages. But this begs the question:

What has he done since he came to Washington to help the poor other than suggesting that they should get a big chunk of money now going to seniors?

  • To answer that one might look at the budget resolution he crafted last year as chairman of the House Budget Committee.

Based on data published on his committee’s website he slashed Medicaid by more than $771 billion over 10 years, which would cut millions of poor children, seniors, and people with disabilities from eligibility. He is particularly savage on the category he lists as “other mandatory,” which includes programs such as Supplemental Assistance for Needy Families, Temporary Aid for Needy Families, and Supplemental Security Income—funding them at only 75 percent of the level the Congressional Budget Office estimates as necessary to maintain current service levels. An analysis by the Center for Budget and Policy Priorities demonstrated that more than two-thirds of his budget cuts come from programs that help low-income families. Now he’s all of a sudden concerned about the poor?

So, if Rep. Ryan is not attacking the elderly for the purpose of helping the poor, why is he doing it? I think the answer is relatively simple: He needs to slash huge amounts from federal retirement programs to pay for tax cuts for the wealthy. His $5.8 trillion in overall spending cuts last year still left huge deficits because of his voracious appetite for tax cuts. Rep. Ryan proposed more than $4 trillion in tax cuts over the course of the decade, lowering the rate at which the wealthiest Americans pay taxes from the 35 percent level in the expiring Bush tax cuts to 25 percent. His plan would reduce total tax liabilities of many millionaires by more than 25 percent—to the tune of hundreds of hundreds of thousands of dollars or in some instances even millions of dollars per each millionaire.

So Rep. Ryan’s March 5 column about taking from the rich (defined as old people living on more than $20,000 a year) and giving to the poor is in fact about taking from the elderly and giving to the rich—akin to a double reverse in football. Let’s hope the defensive backfield in Congress stays alert.

Scott Lilly is a Senior Fellow at the Center for American Progress.

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