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Home Publications Blogs Beat the Press The Government Spends $100 on Bondholders for Every Dollar It Spends on Children

The Government Spends $100 on Bondholders for Every Dollar It Spends on Children

Saturday, 16 February 2013 09:32

Okay, I made up that number, but suppose that I did calculate the amount of money that average holder of government bonds gets in interest each year and compared it to what we spent on children. According to the logic that they use at the Urban Institute (as recounted by Ezra Klein) I would have demonstrated a tendency for our government to favor bondholders at the expense of our nation's children.

The sophisticates out there would surely point out that bondholders paid for their bonds and therefore are entitled to the interest they get on these bonds. Bravo!

Now if anyone with the same level of sophistication entered the halls of the Urban Institute they could point out that we run a old age, survivors and disability insurance program through the government (Social Security) as well as a senior health insurance program (Medicare). The fact that people collect benefits from these programs reflects the fact that they paid premiums during their working lifetimes -- just like bondholders get interest because they paid for their bonds.

In fact, as the Urban Institute has shown, on average Social Security beneficiaries will get slightly less back in benefits than what they paid into the program in premiums. Medicare beneficiaries will get more back, but this is because we pay way more money to our doctors, drug companies and other health care providers than any other people on the planet. In other words, the big gainers here are the providers, not our seniors.

Anyhow, the comparison of payments to seniors with payments to children makes as much sense as comparing payments to bondholders with payments to children. It is understandable that people who want to cut Social Security and Medicare would make such comparisons (or cut interest payments to bondholders), but it is hard to see why anyone engaged in honest policy debate would take such comparisons seriously. 

Comments (9)Add Comment
"Honest" debate
written by Jennifer, February 16, 2013 12:09
"is hard to see why anyone engaged in honest policy debate would take such comparisons seriously."
Of course people who want to cut social services do not want an honest debate, because they know that the facts are not in their favor. It's better to make nonsensical comparisons and confuse people, then they might go for harmful polices.
SS taxpayers get back slightly less than they pay in?
written by coberly, February 16, 2013 1:52
Dean, this is not true.

It is only "true" (note quotes) if you talk in terms of a meaningless "present value" calculation.

There is in fact no Magic Present Value Bank that can give you back more than you get from Social Security. First there is the financial risk... no one can guarantee ANY "return" above inflation. Second there is personal risk: Social Security is insurance, and it makes no more sense to talk about "average" return on your Social Security premium than it does to talk about average return on your car insurance.

Those who fall toward the bottom of lifetime earnings get back an "interest" on the order of 10%... depending on circumstances... and those circumstances are what Social Security was designed to protect all the workers against... because you never know if you are going to be one of those lifetime low earners. Even the very highest earners last time I checked get a "return on investment" that equals inflation plus the average growth in wages. They might beat that "on the market" but not at "no" risk, and not with the insurance they get from SS.

Social Security is not an investment plan, and it is simply a lie to talk about it as though it was. A point that Peter Orszag missed entirely in his book, with his "legacy debt," but managed to fool even most of those who ought to know better.
written by coberly, February 16, 2013 4:11
to be a little clearer: EVERYBODY gets more out of Social Security than they put in. The basic reason is that your generation is paying the 12% tax an average of about 40 years before you collect benefits, when you benefits are paid out of essentially the same number of people (as your generation) paying a 12% tax on an income that is maybe five times as great. About half of that is inflation... but if you tried to "save" the money on your own, you'd still have to find a way to come up with the amount due to inflation plus any real interest.

Medicare ought to work about the same way. But they "fixed" it a few years ago by turning it partially into welfare... so the rich people could always be demanding to cut it. Now instead of paying for it yourself and being able to count on it, you always have to worry that they will cut it and you won't be able to make up the difference when you are old and don't have a job.

But don't think that "pay as you go" means that "you" are paying for someone else's granny. It's true that's where the money goes "directly." But what you are paying for is the "right" to collect a fairly predictable benefit when you need it, based on what YOU paid in, not some young stranger.

The actual mechanics of the money flow is not what is important (except in making pay as you go work). What is important is that YOU pay for your own benefits, and you get back more than what you paid in, due to "interest", interest that comes from the same place as interest on bonds or dividends on stocks... from the growth in the economy and the higher earnings of each subsequent generation.
question Do you get more out of Medicare than you pay in?
written by coberly, February 16, 2013 4:29
When they say you do, are they counting only the Medicare payroll tax, or are they counting that plus the income tax you pay that partially supports Medicare?

I suspect it never occured to them to ask.

But if you are "low income" you probably will get more out than you paid in (even in Present Value), unless you stay healthy. In which case you will be like everyone else who "does not have the fire." Your fire insurance will go to someone who "did have the fire." In general it is better not to get your "fire insurance" money back.

But if you are relatively rich, you almost certainly pay more for Medicare than you will get back. This is why the rich are always trying to cut Medicare. For them it is not "cost effective."

You would be better off if you paid for it yourself. Better to pay a few more dollars when you have the money, that to arrive at a Need in old age and find out some rich person has decided to teach you discipline by cutting Medicare below what you need to pay your medical bills.
written by watermelonpunch, February 16, 2013 6:34
coberly, I hate to have to point this out, but I think you missed the entire point of this post.
Re-read the 1st sentence & last paragraph.

It's all kluged comparisons getting bungled. I'm pretty sure the whole point Dean Baker is making is how kluged all these comparisons turn out to be when you start running with them.
reply to watermelon punch
written by coberly, February 17, 2013 2:56

i got the point. i was not replying to "the point." i was replying to an "error in passing" that Dean let go by.
written by Union Member, February 17, 2013 10:04

You are so right!

Low information voters are made, not born. And they are the most prized asset of political capital for both parties -- the highest form of bipartisanship. Thank you Citizens United, thank you media consolidation. Fairness Doctrine, what was that?
FICA is a tax!
written by Floccina, February 21, 2013 4:25
I never contributed or paid for SS or medicare. I was taxed though! If you think FICA is not a tax try to not pay that tax. Contributed and paid for imply volition! FICA is a tax and you can only tax people so much before they start to avoid the tax sufficiently that you bring in no more revenue with a higher tax. So FICA should be view as just another tax and social security and medicare as welfare programs same as medicaid, food stamps etc.

SS is a welfare program disguised as a Ponzi scheme to make it palatable to voters but as more people are getting on SS the disguise gets more expensive. We need to admit that it is a welfare program and structure it appropriately.

Medical care for the elderly is yields the least bang for the dollar.
One more point
written by Floccina, February 22, 2013 8:33
You were taxed the amount that the median vote thought you should be tax and you will receive the payout that the the median voter thinks you should receive.

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About Beat the Press

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.