Wednesday, February 24, 2010

Are We Overpaying Grandpa?

Copyright, The New York Times Company

The elderly receive a large amount of government assistance – an amount that is not commensurate with their numbers.

The total annual income in the United States (national income, as economists call it) is about $12.5 trillion, or about $40,000 per person per year. The egalitarian view of government is that it taxes persons with annual incomes more than $40,000, and pays benefits to persons with less than $40,000, so that those with incomes less than average could enjoy living standards closer to the average.

For reasons that I began to explain last week, our government actually does the opposite. The vast bulk of government spending goes to the elderly, whose average living standards are significantly above $40,000 per year.

Social Security, Medicare and government employee retirement (federal, state and local) are government funds paid to people aged 62 and over (aged 65 and over, in the case of Medicare), and total about $1.5 trillion in the current fiscal year. Annual Medicare spending is $12,000 per person aged 65 and over, and growing. Annual Social Security and government employee retirement payments are $21,000 per person aged 62 and over.

Medicaid, hospital and other public health programs are open to persons of all ages, although those programs spend more per participant on the elderly than on the others. I estimate that, on average, these health programs are annually spending $7,000 per American aged 65 and over.

Combined, the public pension and public health programs are spending an average of $40,000 per elderly American per year. Thus, even if elderly Americans could rely on no other income source, on average they could have living standards of $40,000 per year. Moreover, many of the elderly have significant private incomes and wealth in their homes, which means that elderly average living standards actually far exceed $40,000 and thereby exceed the living standards of the average American.

How is it possible that so much government spending goes to persons with above average living standards? This is one of the great puzzles in economics and political science. Some (including commenters on last week’s blog entry) have argued that elderly Americans vote more frequently, and with more attention to Social Security and health policies. However, that does not explain why non-democratic governments – where leaders were not chosen by free and competitive elections – also pay at least as much to their elderly citizens.

Another explanation is that the marketplace is far from egalitarian, and it is difficult for the government to be much different.

If a family thinks it is appropriate for grandfather to have a higher living standard than his grandchildren, then they probably would not support a government that attempted to reverse that pattern. The question for the future of Medicare is this: Are families ready to triple their spending on the health care of their highest-income members?


suz said...

Mr. Mulligan, it's obvious you either come from money or have no elderly family trying to eke out an existence on all that "wealth"! My parents were raised during the depression. My dad left school in the 10th grade to help earn money for the family. He joined the CCC and then the Navy and fought in WWII. He joined the Local 4 construction workers union when he got back. He worked very hard all his life, never took vacations and often worked 2 jobs. My mother taught in Catholic schools for 14 years. Dad had to retire at 65 with emphysema. They had his pension and their social security. They also had all the expenses related to his illness, which included prostate cancer and my mother's heart problems and diabetes. They sold their home and moved to a tiny apartment in a senior complex. In comparison to most of the people there, they were rich. Most of these people worked the textile mills, which went bankrupt, before pensions were protected, so they only had social security. $21,000 is not much money. It's $403 a week. Most senior programs take about 40% to 60% of your income, which leaves about $173 to $242 a week. Now that $12,000 in Medicare is not a realistic number because you don't clarify that Medicare does not cover a lot of meds and doesn't cover all medical care, which is why these people now have to carry additional insurance paid out of their own pockets. With all that wealth that's left, they get to pay for their phone, cable-because the government has allowed the cable companies to set up TV so that antennas and rabbit ears, which once gave us free TV, don't work (and this is usually their only entertainment). They have to buy groceries and cleaning products and do their laundry and maybe buy a card and tiny gift for birthdays, etc., for grandchildren.
Many elderly don't live that well. If the government wants to cut costs, (1) get the hell out of the mideast-we are wasting far more there, not to begin to include the cost of lives lost or seriously hurt, than we are spending on the elderly; (2) don't bail out self-centered, egostical, greedy bastards on Wall Street. Some day you are going to be old and there is no guaranty you'll have the money you have now. Could you live like you think these elderly should? Oh, and those that had homes - once they have to go into assisted living or nursing homes - that money is history. It would be cheaper for them to get a suite at a 5-star hotel, use room service and have a nurse come in. Why don't you run THOSE numbers. I get absolutely furious with you people who have absolutely no idea what you are talking about. So you can run numbers. This isn't about numbers, THIS IS ABOUT PEOPLE!!!!!!

Secret Economist said...

This post is spot on. Why does the U.S. provide income support to elderly citizens who do not need it? According to table S0103 of the American Community Survey (run by the census), the mean earnings of 65+ households (before SSI and public assistance) was $43,789.

Means testing social benefits should apply to the old equally as they apply to the young. It's not just a matter of fairness; it's a matter of solvency. We will never contain government spending with social security and medicare off the table.

Prudence said...


While I do not have time to address all of your emotional output, it is important to note that Professor Mulligan is not assigning a value judgment on the degree of care the elderly receive - or should receive. He is merely stating a fact - that the elderly in this country often live above the national standard of living and that standard of living is subsidized by the rest of us. Whether you think that is good or not is certainly your prerogative. However, it is not incorrect to say economically that we are over-subsidizing a certain part of our population and that most people do not even realize it for the very reasons you mentioned. No one wants to see Grandpa out on the street corner starving to death or having to choose between eating and taking life-saving medication. However, as noted, that is "about people" and economics is not. Economics is composed of and based upon human behavior, but does not assign value judgments to human beings or their actions. This is a fundamental problem in both the political and economic discourse in the this country, which you Suz are a perfect example. If you are looking for politics to solve your problems about the treatment of people as individual human beings you are historically looking in the wrong place.

DWAnderson said...

The puzzle as to why som much is spent on the elderly isn't that hard to figure out: (i) they have a persuasive (at least to many) claim on Social Security and Medicare on the grounds that they contributed to the programs with the expectation of future promised benefits; (ii) although medical care costs the elderly more, it is not clear even after that expenditure they are better off than their younger, healthier counterparts; and (iii) with age comes other non-monetary costs that make the elderly worse off and money to some extent compensates them for that. This doesn't strike me as a great state of affairs either, but until opponents of this come up with a more persuasive narrative, this state of affairs will continue. Good luck in that endeavor (sincerely)!

TGGP said...

You should ask Robin Hanson for an explanation of these policies.

dlr said...

Your numbers are flawed. Social Security, Medicare are at least partially paid for by the recipient's 'contributions' in the years before they retire. There is a transfer effect, but it isn't 100 cents on the dollar. Saying it is, misrepresents the situation.

The Federal, State, and Local retirement benefits are even less appropriate to lump in with transfer payments. Retirement benefits are part of the employees compensation. It's not a transfer payment anymore than the retirement benefits of private companies are transfer payments. If you want to characterise Federal, State, and Local retirement benefits as transfer payments, then you need to prove that they are more generous than equivalent private retirement benefits - and only count the excess value as a transfer payment. And actually even then it shouldn't be counted as a transfer from the young to the old - it should be counted as a transfer from the US taxpayer to government workers. I believe that government workers actually are overpaid, because of things like public service unions, etc, but this isn't a young/old issue. In this case it isn't the old exploiting the young - it is the public employees exploiting all the rest of us.