Redistribution of Income: Not From the Rich to the Poor But From the Young to the Old

Stanford University’s John Cogan has a good piece in the Wall Street Journal today that provides a very sobering look at the redistributive system that we have in place. First, who is getting what and how much? By Cogan’s calculations the average retiree couple will be getting roughly a $1 million through Social Security and Medicare throughout their retirement.

Starting next year, this typical couple, receiving the average benefit, will begin collecting a combination of cash and health-care entitlement benefits that will total $1 million over their remaining expected lifetime.

According to my calculations based on government data, such married couples will begin receiving monthly Social Security checks that will, on average, total about $550,000 after inflation. They will receive health-care services paid for by Medicare that, on average, will total another $450,000 after inflation. The benefactors will be a generation of younger workers who are trying to support themselves and their families while paying taxes to finance the rest of government spending.

The Tax Policy Center has some interesting tables on the issue here.

Second, who is paying? The redistribution of income sends money much less from the rich to the poor than from the young to the old. These are some important paragraphs:

The existence of so many million-dollar couples is not the result of elected officials carefully weighing the needs of senior citizens against the financial ability of younger workers to meet these needs. Rather, it is the result of decades of separate legislative actions by both political parties to liberalize retirement and health-care benefits, the sum total of which no one has bothered to calculate. […]

Many of the million-dollar couples believe they rightfully deserve the benefits they have been promised. They have, after all, spent all of their working years paying into Social Security and Medicare. And true enough, the typical 66-year old couple and their employers, on their behalf, have contributed nearly $500,000 in payroll taxes (in today’s dollars) toward these benefits during their working careers.

But regardless of how much they have contributed, the hard reality is that the federal government has already spent it. No matter how deserving they are, it is younger generations of workers who have to come up with the money.

That’s right: There isn’t a bank account with people’s names written on it, nor is there a lock box that contains extra payroll taxes collected since the 1980s. The money is gone and has been spent over the years on things like roads, student loans, wars, and farms subsidies. If Medicare and Social Security are going to pay out benefits promised to people by lawmakers, money will have to be borrowed or taxes will have to be raised to make up the difference between the promise and the taxes collected. We know that Social Security will permanently run a cash-flow deficit starting in 2014. That means taxes collected each year won’t be enough to cover the benefits paid out that year.

Here is additional data put together by Andrew Biggs at the American Enterprise Institute. He looks at the “net tax rate” for Social Security — that is, the statutory 12.4 percent Social Security tax paid by workers minus the benefits they receive from the program. A negative net tax means that the people in the quintile receive on average more benefits than they pay in taxes in the course of their lives. A positive net tax means that less benefits are received than taxes are paid.

The table shows that the two top quintiles paid more in taxes than they receive in benefits. Based on income distribution data from the Tax Policy Center, for 2008 (most recent IRS data) the second quintile begins at cash income of $18,725; the middle quintile at $37,257; the fourth quintile at $65,634; the 80th percentile at $110,346. I suspect that very few people realize that anyone making above $65k pays more in Social Security taxes than they receive in benefits.

Have a good day now.


Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University. Her primary research interests include the U.S. economy, the federal budget, homeland security, taxation, ...

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