False Poverty: The Nation Can't Afford To Care For Its Elderly

March 31, 2000

Dean Baker
Aging Today, March/April 2000

A constant refrain in national political debates is that the growing population of elderly threatens to bankrupt Social Security and Medicare, and drain resources from other important government programs. Politicians of both parties are putting forward plans to “save” Social Security and Medicare, as though these programs were at the edge of a cliff in danger of falling over.

The reality is quite different. Social Security is projected to be fully solvent for more than three decades, even if nothing is done. Medicare is projected to be fully solvent for nearly two decades, a time span far longer than the planning period for most programs and more than twice the constitutional term limit for the President elected in 2000. Even after these dates, the tax increases that would be needed to support these programs are not large compared to tax increases put in place in previous decades. These are the basic facts available to anyone who picks up the government’s projections for these programs.

But even more troubling than the specifics on the finances of these programs is the general context of the public debate. These programs are discussed in a context that implies the United States is somehow becoming poorer as a nation. While it may have been possible for our parents and grandparents to retire and start drawing Social Security benefits at age 65 (or reduced benefits at age 62), many argue that the current generation of young workers should have to work until they reach age 68 or even 70. According to the conventional wisdom the nation’s workforce simply cannot continue to support a growing population of retirees.

There is a simple but important fact that is often left out of this discussion. The nation is getting richer as time passes. According to the Social Security trustees projections, productivity is increasing at the rate of 1.35 percent annually. (Productivity growth has been even more rapid in Europe, averaging close to 2.0 percent annually.) This means that each year, workers are producing an average of 1.35 percent more in every hour of work than they did the previous year.

Over ten years, this means an increase in output of more than 14 percent. After thirty years the increase will be nearly 50 percent. And after fifty years, hourly output will have almost doubled. In other words, wages and income (in today’s dollars) will be on average nearly twice as high in 2050 as they are today. If just a small portion of this increase in income is funneled into supporting programs like Social Security, Medicare, and other programs for the elderly, these programs can be amply funded indefinitely, while still allowing significant gains in living standards for the working population.

Unfortunately, Social Security and Medicare have been primarily financed through wage taxes. These are regressive since they allow property income, such as stock gains or dividend payments, to escape taxation. The Social Security tax is particularly regressive since workers do not pay taxes on wages above $75,000. But these programs, and other public services for the elderly, need not be financed in such a regressive manner. There are simple forms of taxation that would affect those most able to pay, and still raise enormous amounts of money.

One such change in the tax code is simply to restore the capital gain tax rate to the level it was at before the Republicans took over Congress. Prior to 1997, most capital gains were taxed at a 28 percent rate. This is the same tax rate that most middle income workers pay on their wages. However, Congress decided that it was better to tax workers’ wages than the capital gains of wealthy stockholders like Bill Gates, so it lowered the tax rate on capital gains to 20 percent.

In the last four years, the capital gains earned on the stock market come to approximately $10 trillion. The impact of the cut in the capital gains tax rate on this sum is a loss to the government of approximately $800 billion (not all of these gains will necessarily be subject to taxation). This revenue would be sufficient to entirely fund the fund the Medicare program for nearly four years.

A second tax that would primarily hit the wealthy, and would also have the benefit of making the nation’s financial markets more efficient, is a tax on financial speculation. A massive industry has grown up in recent years speculating on stocks, bonds, foreign currencies, and other financial assets. These speculators are not buying stock with the idea of holding it for three or five years because they think a company shows solid growth potential. Rather, they buy shares of stock or huge quantities of foreign currency because they think their price will rise over the next week, day, or even hour. The Internet has allowed small investors to engage in the same sort of speculation.

A very modest tax on this sort of gambling would raise an enormous amount of revenue, while barely affecting the vast majority of normal investors. If each sale or purchase of a share of stock were taxed a 0.25 percent rate, and trades of other financial assets were taxed at comparable rates, it could easily raise more than $100 billion a year in revenue. This amount of revenue would make the Social Security or Medicare trust funds fully solvent for their seventy five year planning horizons. Alternatively, it would be more than enough money to provide health insurance coverage to the nation’s uninsured, or to support many other badly under funded programs such as Headstart or the Women, Infant, and Children’s nutrition program.

Restoring the capital gains tax and imposing a tax on financial speculation are just two of the ways that the nation can recapture some of the enormous wealth the economy is generating in order to support valuable public programs. The key point is that the nation produces more than enough wealth to provide the essential services that so many people depend upon. It will produce even more wealth in the future as new technologies make workers more productive and the society even wealthier. The nation can now and will in the future be able to care for its elderly and its children. It is only a question of political commitment, not economic capability.

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