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Home Publications Blogs Beat the Press Fareed Zakaria Is Upset Because the Government Spends So Much More on Each Rich Person Than on Each Child

Fareed Zakaria Is Upset Because the Government Spends So Much More on Each Rich Person Than on Each Child

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Monday, 07 March 2011 04:56

Actually Zakaria is not upset that the government will give far more money to the average rich person this year than the average child. He is upset that it spends more money on the elderly.

The main reason that the government spends more on the elderly than the young is that we run a public pension program, Social Security, through the government. We also run a seniors' health insurance program, Medicare, through the government. In both cases people pay a dedicated tax for these benefits. (The Medicare tax does not pay for the whole cost of the program.)

Zakaria is upset that seniors are allowed to receive the benefits that they have paid for. By the same logic, he should be upset that billionaires like Peter Peterson can get millions or even tens of millions of dollars in interest each year on the government bonds they own. After all, this money would be far better spent educating our children than being put in the pockets of these incredibly wealthy people. The Zakaria methodology would have us go after these interest payments on the debt, if it were applied consistently.

Comments (22)Add Comment
Teabaggers Agree
written by izzatzo, March 07, 2011 6:15
The Teabagger Death Panel Association of America is proud to have Whose Your Nanny Baker join its ranks to protect the elderly from an early demise due to shameless efforts to cut the huge amount of spending on health care in the last few months of life.
Agree- the rational didn't make sense
written by STeve, March 07, 2011 7:11
I agree. I heard Zakaria talk about this on NPR (maybe Spitzer's show?) and I thought his comparison was faulty. He was trying to make the point that we should invest more in our children than we do, but when he compared it to how much we spend on the elderly, I was thinking that the money we spend on the elderly isn't really entitlements, it's money that the elderly has already paid for.
Not exactly how Social Security and Medicare works
written by TomJoad1980, March 07, 2011 8:40
The idea that the elderly are simply receiving money paid is fallacious. The way the SS and Medicare system works is current taxpayers pay for the benefits of the elderly today, and future taxpayers will pay for my benefits later. They are getting this money because they paid into the program--sort of like a membership due. They are not receiving the money they paid into it. If there were the case, why pay into the system to start with?

The analogy to the wealthy man owning government bonds just illustrates how far off the mark this is. A better question: if I'm a CEO at a company that received billions in taxpayers money to stay afloat and I receive 100 million dollar bonus at the same time, shouldn't I at least be expected to pay a tax rate 3% higher than today's rate? Unfortunately, we argued that all those people with wealth, whose wealth was inherent on the government handouts, shouldn't have to pay a slightly higher rate.

So, to offset this, we take money away from our children.
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written by skeptonomist, March 07, 2011 8:51
Presumably both underage and overage people need support from working people. The federal government runs SS and Medicare, which take care of the elderly. State and local governments run schools, which are for children. The state and local taxes for schools, including income, property and sales taxes, are typically as high as the payroll taxes for SS, although this depends on income level. Currently children are expected to live with their parents, which cuts down on their expenses, while the elderly very often live on their own. In the 19th century, when most people lived on farms, the elderly also lived with their offspring, so there was less necessity for special support for the elderly, and those elderly who had no one to support them were in poor houses which were mostly locally supported.
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written by skeptonomist, March 07, 2011 9:03
Strictly speaking, SS recipients have not paid for their own benefits. Payments from the program commenced almost immediately, as soon as a small buffer was built up. Even now retirees receive more than they have paid in because of population growth. Apart from the population bulge of the baby boom, SS just transfers income from working people to retirees.

While it is important to emphasize that elderly people now are not getting something for nothing, it is also important to dispel the very common misconception that SS is like a private retirement fund which only pays our what you put in, with earnings. I suspect that many if not most people identify SS with the Trust Fund and think that when the Trust Fund runs out there will be no more money.
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written by Bloix, March 07, 2011 9:54
This is just a variation on the usual slight of hand: when pundits talk about social security benefits, the money the governmetn receives from FICA payroll taxes are treated as no different from any other income tax. But when pundits argue that the tax burden falls too heavily on the wealthy, they exclude FICA payroll taxes from "income" tax.
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written by PeonInChief, March 07, 2011 9:54
Actually boomer retirees, unlike previous and future generations, did pay extra for their own retirement. The argument in 1983 was that there were simply too many boomers and too few of the next generation to keep the system as it was.
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written by Bloix, March 07, 2011 9:56
And skeptonomist identifies another sight-of-hand. When arguing that Social Security is "broke" (or is "paying out more than it takes in"), critics focus on the Trust Fund. But when arguing that it's a "Ponzi Scheme," they focus on the pay-as-you-go aspect of the program.
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written by AbqMike, March 07, 2011 10:32
Skeptonomist: Two qualifying points about your comments. First, a significant portion of SS and Medicare payments go to persons with severe disabilities (and a lot of SS also goes to young survivors of deceased spouses and parents). Second, while you are obviously right that MANY SS beneficiaries get more in payments than they paid in (don't forget, many SS contributors die before they can receive any payments, or receive payments for only a few years), the same is true of most people with pensions, investments, bank accounts, and, as Dean would note, especially folks like Pete Peterson.
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written by skeptonomist, March 07, 2011 1:48
I previously wrote up some aspects of the demographics here:

http://www.skeptometrics.org/RealDemographics.html

Dean has often emphasized that workers have to support younger as well as older people. The fraction of working people in the population (blue curve) has not changed much and will not change much in the future.
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written by Calgacus, March 07, 2011 2:54
PeonInChief brings up the 1983 Greenspan tax hike scam and the argument that there were too many boomers. Of course this was a good thing back then for SS - many people to work to support relatively few elderly.

So a Big Lie campaign was necessary. The SS tax was raised. This had the following effects, all delicious to the oligarchy: 1)Money was taken out of ordinary working people's hands 2)This deflated the dollar & slowed economic growth 3)Which made the Reagan tax cuts on the rich more valuable 4)Increased inequality, higher Gini coefficient, the Clinton surplus - necessitating more private debt to keep the economy going, which caused financial instability 5)SS was thus made less popular among the lesser people class - they were both being grossly overtaxed for it and led to believe it was running out of money! 6) And because of 5, now we can rip off the boomers, who have doubly or triply paid for Social Security, by making SS cuts.

The real threat to the oligarchy was always now, when boomer retirement raised the spectre of the US government spending money on sane purposes for the lesser people, for their retirement, which would boost aggregate demand and economic growth, and might cause real prosperity for the lesser people, of the kind that hadn't been seen since the 60s and 70s. The oligarchy insists that all resources and wealth go towards its insane, disgusting purposes like the military-industrial complex.

If the mindless mainstream says something is good (and necessary) - the SS tax hike - it is bad (completely destructive and totally avoidable). And vice versa - the boomer retirement and rising dependency ratio could be an enormous boon to the economy, so the oligarchs with great success planned to forestall this horrible-to-them spectre.

Note: Boomers' double or triple payment: The most important - and therefore never mentioned - way the boomers (and anyone else) pays for their retirement is the work they do during their lives, building a productive economy. The second way was "paying their dues" - the pay-as-you-go part of SS taxation, paying for their parents' retirement. The third way was the Greenspan gross overtaxation that built up the Trust Fund to its grotesque size, wreaking great damage on the economy - a complete ripoff of the boomers and non-billionaires.
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written by bxg, March 07, 2011 4:15
By helpfully segregating SS payments from other taxes (and if I then pretend all taxes aren't fungible at the end of the day) the U.S. goes out of its way to tell me _precisely_ what happens to the money I pay in today. *It is spent on today's retirees.* People who won't be around to reciprocate when I retire. It's not spent on infrastructure that will benefit the future. It isn't spent on financial instruments (savings) for the future (except for a relatively small proportion that accumulates to the trust fund). It's *current expenditure* to give today's retirees a more decent life.

While I may think SS is the greatest scheme in the world (and I think it's pretty good), what POSSIBLE interpretation of these facts would lead anyone to honestly say that I am "paying for" my future benefits. I know what I'm paying for! Current retirees.

How can you draw an equivalence between this and a bunch of bonds (explicit title in savings held for the future)?
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written by urban legend, March 07, 2011 8:38
As with any defined benefit pension program, current revenues from current contributors are technically paying for current benefits -- just as I did for retirees while I was working. But this technicality is silly: the point is, your benefits are est5ablished as a matter of legal right substantially based on your actual contributions.
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written by bxg, March 07, 2011 9:20
"legal right"? Do you mean anything else but "as of the law right now, subject to voters and legislatures not deciding to change it".

Government workers in Wisconsin have the legal right to collective bargaining today, and tomorrow they may not. Single unemployed parents may be legally allowed $X today, but if the law changes 80% of X tomorrow. Etc.

Let's suppose that the youth of 2040 have the votes, control congress, and then decide to change the law to halve our SS benefits. Do you believe we would have any LEGAL, MORAL, or CONSTITUTIONAL right to complain - more than anyone else who gets adversely affected by a change in some law that used to give then benefits but then does not?

Yes, we have a right to get what the law says, until such time as the the law changes. There's no strong reason to believe that SS is morally or legally protected against such changes. Unlike, say, a repudiation of U.S. debt. Call me back when there is a commitment to make the trust fund large enough to pay for - 50%, 20%, 10%, 5%, 3% even??? - of it's so-called obligations.
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written by bxg, March 07, 2011 9:33
And you are simply wrong, just speaking nonsense, when you say this is true of "any defined benefits pension plan". Even in the US, outside of SS, defined benefit plans are supposed to have investments to cover their obligations. No one is allowed to day "sure, we'll be in business and thriving 30 years from now, so we're going to rely on our future employees". Yes, maybe they may play accounting games and cook the books (at big problem, true) but the underlying principle is to fund their obligations. It is a bald lie, else such total ignorance of the basics of pension obligations that I wonder why you would post here, to say "As with any defined benefit pension program, current revenues from current contributors are technically paying for current benefits". _Technically_, defined benefit pension obligations are supposed so build and endownment that (actuarially) enough for future obligations. If the company went bankrupt tomorrow they are supposed to have enough. But they've probably cheated, so it's only going to be 80% enough. Or 50% worst case. But they are supposed to have enough and even in the worst cases it will be a factor of two off. SS is not supposed to have enough, doesn't even try, and that's fine (I would say) ... but it is just NOTHING like they way any other defined benefit plan - either inside corporate US or indeed in most stable western nations - does things.
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written by Calgacus, March 08, 2011 7:17
BXG is largely correct. He is wrong when he says that there is no moral obligation not to change the law in 2040. That will not happen - people are not that amoral. The 3 reasons I gave above are than ample moral reasons to not rip off the elderly of 2040. The scheme to destroy SS can only proceed by the Big Lie technique, that there is no money.

SS is a government program, which makes it utterly different from a private pension plan. State social insurance in other states works/worked in similar ways.

Many states recently went down the path of the lead lemming, the USA, and moved from old-fashioned FDR style pay-as-you-go (macro neutral) to the Looney Tunes neoliberal overtaxation/ "actuarially sound" /trust fund approach. France was an exception - and not coincidentally saw its wealth distribution go against the worldwide trend and its own history as a high-inequality rich state, and become flatter. And of course, as always, equality and the refusal to overtax the working class was a boon to their economy.

The big trust fund IS the scam. It is nothing but an accounting record of gross overtaxation, of macroeconomic destabilization. It is simply impossible for the government to save up its own money in a trust fund. Until it is spent, government money is not money, which is by definition a debt of the government, a credit of the holder.

One of the few good things Obama did was cut the tax for a year - a real world act. Because of modern macroeconomic madness - he "replaced" the "lost revenue" with bonds in the trust fund. He & Congress could & should have put an additional Zillion Trillion dollars in there too, just to shut up the SS-haters, but that would be meaningless too until they are spent.

If we hadn't engaged in SS overtaxation, the US would right now be a richer, more equal, more just place, better able to provide for retirement. It was pure self-inflicted-pain, with the sole purpose and effect of relatively enriching the wealthy.
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written by izzatzo, March 08, 2011 8:41
That will not happen - people are not that amoral.


Et tu, Calgacus?
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written by Calgacus, March 08, 2011 1:19
Et tu, Calgacus?

? izzatzo ?
Your all-wise, all seeing, Sibyllic wisdom is too obscure for this man of hoi polloi.

Unlike BXG, I'm saying there is a very clear, very strong moral obligation, because people do "(over)pay for" their future benefits, as much as is possible for a government program.

He's right there is no legal obligation, your future SS benefit stream is legally not property. But the "youth of 2040" halving benefits would be cutting their own throats, as such a huge cut in government spending would create a giant depression.
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written by bxg, March 08, 2011 9:46
> BXG is largely correct. He is wrong when he says that there is no moral obligation not to change the law in 2040.
> He's right there is no legal obligation, your future SS benefit stream is legally not property. But the "youth of 2040" halving benefits would be cutting their own throats

I can't tell what 2040 is like. Maybe the U.S. is much poorer. Maybe there was a giant earthquake in California and people are starving. I would hope that the Congress of 2040 spend their taxes wisely and compassionately, and that definitely doesn't include cutting off the SS recipients just to spite them or so they can reduce Hedge Fund manager's taxes to an even smaller % than anyone else.
But if these people size things up and say "Yes, we understand what you expected, but we could do so much more good over here and there's only a finite pot, so we just have to change the law" we have limited grounds to object. Specifically, our ground is: "Hey, 50 years ago we passed a law requiring that when you grew up you would pay us". And, specifically, we have no grounds at all along the lines "Hey, we invested such-and-such funds for our future and you are stealing our legitimate investment"

I hope, wish, and expect the future generation to be there for me when I retire. I will be disappointed if they cannot, and irate if they will not but cannot. But unless they revoked the trust fund treasuries (which they wouldn't, since it's a triviality) I could never bring myself to say "You cheated me. I'm _owed_ this, and you don't get any discretion in it". Because that would be a lie.

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written by Calgacus, March 09, 2011 2:31
Ordinary morality is that the younger generation, having been taken care of by the older when it was unable to take care of itself, will return the favor. Of course it depends on the real situation in 2040. But it isn't very complicated, or different from what has happened for many millennia, just made more systematic and predictable through the government. And in any case, old people vote.
SS is a welfare program disguised as a retirement plan
written by Floccina, March 09, 2011 12:30
SS is a welfare program disguised as a retirement plan. Let us drop the disguise and get rid of the FICA tax and replace it with higher income taxes and equalize the payout to everyone.
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written by Min, March 10, 2011 8:50
"The Zakaria methodology would have us go after these interest payments on the debt, if it were applied consistently."

Well, the interest payments on gov't bonds are a form of subsidy. We don't have to issue gov't bonds. We are not on the gold standard anymore.

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Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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