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Who’s a Freeloader?

Thursday, 15 March 2012 09:09 By James Kwak, The Baseline Scenario | Op-Ed

A year ago, Vanessa Williamson, Theda Skocpol, and John Coggin published a paper based on their in-depth interviews of Tea Party activists. A longer presentation of their research was published as a book a few months ago, and I was reminded of it by historian Daniel Rodgers’s review in Democracy.*

Rodgers’s review is titled “‘Moocher Class’ Warfare,” picking up on one of their key findings: in general, Tea Party members like Medicare and Social Security, which they think they have earned through their work, but don’t like perceived freeloaders who live off of other peoples’ work. From the paper (p. 33):

The distinction between “workers” and “people who don’t work” is fundamental to Tea Party ideology on the ground. First and foremost, Tea Party activists identify themselves as productive citizens. . . . This self-definition is posed in opposition to nonworkers seen as profiting from government support for whom Tea Party adherents see themselves as footing the bill. . . . Tea Party anger is stoked by perceived redistributions—and the threat of future redistributions—from the deserving to the undeserving. Government programs are not intrinsically objectionable in the minds of Tea Party activists, and certainly not when they go to help them. Rather, government spending is seen as corrupted by creating benefits for people who do not contribute, who take handouts at the expense of hard-working Americans.

Let’s leave aside the self-serving nature of this distinction—I deserve my entitlement programs, but you don’t deserve yours. Does it even make any sense?

Imagine Alice works from twenty-five to fifty-five making $30,000 per year, more than double the minimum wage. Then she loses her job and goes on Medicaid—a classic “welfare” program. Then imagine Beatrice, who works from twenty-five to sixty-five making $30,000 per year. (For simplicity, let’s assume each person goes on benefits in 2012, and those $30,000 are constant 2012 dollars.) Then she retires and goes on Medicare—an entitlement she has “earned,” according to Tea Party logic. Assume that each person paid $1,000 in federal income taxes each year. Who’s the freeloader?

Each year, Beatrice paid $870 in Medicare payroll taxes. In addition, about 16 percent of her income taxes went to Medicare,** for another $160 per year. So over forty years, she contributed about $41,000. At retirement, she will have a life expectancy of about twenty years. Annual Medicare spending per beneficiary is projected by the CBO to be about $15,000 in 2022 (right in the middle of her benefit period), or maybe $12,000 in 2012 dollars, so she can expect to receive total Medicare benefits of about $240,000. That means her net transfer is about $199,000, or $10,000 per year.

About 21 percent of Alice’s federal income taxes go to Medicaid,*** so she contributed $210 per year, or about $6,000. (Let’s assume she paid no state taxes, which makes her look worse.) Total federal Medicaid expenditures were $273 billion in 2010; the federal government pays 57 percent of total Medicaid expenses; and there are about 56 million beneficiaries at any one time; so the average cost per full-year beneficiary is about $8,600. 49 percent of Medicaid spending, however, goes to long-term care, even though only 7 percent of Medicaid beneficiaries received long-term care benefits,**** so the average annual cost per non-long-term care beneficiary is about $4,700.***** So between the ages of 55 and 65, Alice’s total benefits are worth $47,000, for a net transfer of $41,000, or $4,100 per year. Even if we double her average cost because of her age, we still get net benefits of $88,000, or $8,800 per year.

By now, the answer should be obvious. From the perspective of net benefits, they are both freeloaders. There are a host of approximations in the above calculations, but the bottom line is clear: low- to middle-income workers benefit massively from redistribution in both Medicare and Medicaid. On an annual basis, it seems like Medicare beneficiaries are freeloading even more than Medicaid beneficiaries, primarily because Medicare is more generous and because Medicare beneficiaries are older and hence consume more health care. From a lifetime perspective, however, Alice is a bit more of a freeloader than Beatrice because she will benefit both from Medicaid for ten years and then from Medicare for the rest of her life.

(In the example above, I had Alice work for thirty years and then go on Medicaid for ten. If she worked for ten and went on Medicaid for thirty, you would get similar results. Then her total benefits would be 3 x $47,000 = $141,000, her contributions would be $2,000, her total transfer would be $139,000—still less than Beatrice’s total Medicare transfer—are her annual transfer would $4,600. The major driving factor is simply that Medicaid isn’t that generous.)

The moral of the story is that if you follow the money, almost everyone is a freeloader; by this criterion, there’s no meaningful distinction between Social Security and Medicare, on the one hand, and welfare programs, on the other hand.

But from my perspective, neither Alice nor Beatrice is a freeloader. The right way to look at Social Security, Medicare, and Medicaid, in my opinion, is as insurance programs. They protect people against risks that may not materialize until decades in the future (unemployment, disability, death of a spouse, poor health, health care inflation, etc.). When Alice and Beatrice entered the workforce at age twenty-five, neither one could know which of the two would lose her job thirty years later, so they both benefit equally from the existence of Medicaid. I guess if someone never has any intention of working but plans to simply live off of welfare programs you could call her a freeloader, but given the paucity of the current safety net I don’t think that’s a viable strategy in this country.

As I wrote in yesterday’s post, Americans like the things that government spends money on, but they claim not to like government, which leads to our current political mess. In White House Burning, we argue that providing social insurance is an essential and valuable function of the federal government. If people realize that the government’s principal activity is protecting them against long-term risks through programs that they already like, they may change their opinions of the government and their willingness to pay for it. We can all dream.

* I have not read the book, but I did read the paper.

** In 2010, general revenue contributions to Medicare were $213 billion, which is 16 percent of total tax revenues, excluding payroll taxes, of $1,298 billion. Those figures are from the OMB Fiscal Year 2012 budget, Historical Tables, Tables 2.1 and 13.1.

*** In 2010, federal spending on Medicaid was $273 billion. That’s from Table 11.3.

**** Total Medicaid spending in 2009 was $251 billion (Table 11.3). Long-term care spending was $122 billion.

***** It is appropriate to subtract out Medicaid long-term care benefits because Medicaid is the long-term care safety net for Medicare beneficiaries, so the value of those benefits is the same for Medicaid and Medicare enrollees.


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Who’s a Freeloader?

Thursday, 15 March 2012 09:09 By James Kwak, The Baseline Scenario | Op-Ed

A year ago, Vanessa Williamson, Theda Skocpol, and John Coggin published a paper based on their in-depth interviews of Tea Party activists. A longer presentation of their research was published as a book a few months ago, and I was reminded of it by historian Daniel Rodgers’s review in Democracy.*

Rodgers’s review is titled “‘Moocher Class’ Warfare,” picking up on one of their key findings: in general, Tea Party members like Medicare and Social Security, which they think they have earned through their work, but don’t like perceived freeloaders who live off of other peoples’ work. From the paper (p. 33):

The distinction between “workers” and “people who don’t work” is fundamental to Tea Party ideology on the ground. First and foremost, Tea Party activists identify themselves as productive citizens. . . . This self-definition is posed in opposition to nonworkers seen as profiting from government support for whom Tea Party adherents see themselves as footing the bill. . . . Tea Party anger is stoked by perceived redistributions—and the threat of future redistributions—from the deserving to the undeserving. Government programs are not intrinsically objectionable in the minds of Tea Party activists, and certainly not when they go to help them. Rather, government spending is seen as corrupted by creating benefits for people who do not contribute, who take handouts at the expense of hard-working Americans.

Let’s leave aside the self-serving nature of this distinction—I deserve my entitlement programs, but you don’t deserve yours. Does it even make any sense?

Imagine Alice works from twenty-five to fifty-five making $30,000 per year, more than double the minimum wage. Then she loses her job and goes on Medicaid—a classic “welfare” program. Then imagine Beatrice, who works from twenty-five to sixty-five making $30,000 per year. (For simplicity, let’s assume each person goes on benefits in 2012, and those $30,000 are constant 2012 dollars.) Then she retires and goes on Medicare—an entitlement she has “earned,” according to Tea Party logic. Assume that each person paid $1,000 in federal income taxes each year. Who’s the freeloader?

Each year, Beatrice paid $870 in Medicare payroll taxes. In addition, about 16 percent of her income taxes went to Medicare,** for another $160 per year. So over forty years, she contributed about $41,000. At retirement, she will have a life expectancy of about twenty years. Annual Medicare spending per beneficiary is projected by the CBO to be about $15,000 in 2022 (right in the middle of her benefit period), or maybe $12,000 in 2012 dollars, so she can expect to receive total Medicare benefits of about $240,000. That means her net transfer is about $199,000, or $10,000 per year.

About 21 percent of Alice’s federal income taxes go to Medicaid,*** so she contributed $210 per year, or about $6,000. (Let’s assume she paid no state taxes, which makes her look worse.) Total federal Medicaid expenditures were $273 billion in 2010; the federal government pays 57 percent of total Medicaid expenses; and there are about 56 million beneficiaries at any one time; so the average cost per full-year beneficiary is about $8,600. 49 percent of Medicaid spending, however, goes to long-term care, even though only 7 percent of Medicaid beneficiaries received long-term care benefits,**** so the average annual cost per non-long-term care beneficiary is about $4,700.***** So between the ages of 55 and 65, Alice’s total benefits are worth $47,000, for a net transfer of $41,000, or $4,100 per year. Even if we double her average cost because of her age, we still get net benefits of $88,000, or $8,800 per year.

By now, the answer should be obvious. From the perspective of net benefits, they are both freeloaders. There are a host of approximations in the above calculations, but the bottom line is clear: low- to middle-income workers benefit massively from redistribution in both Medicare and Medicaid. On an annual basis, it seems like Medicare beneficiaries are freeloading even more than Medicaid beneficiaries, primarily because Medicare is more generous and because Medicare beneficiaries are older and hence consume more health care. From a lifetime perspective, however, Alice is a bit more of a freeloader than Beatrice because she will benefit both from Medicaid for ten years and then from Medicare for the rest of her life.

(In the example above, I had Alice work for thirty years and then go on Medicaid for ten. If she worked for ten and went on Medicaid for thirty, you would get similar results. Then her total benefits would be 3 x $47,000 = $141,000, her contributions would be $2,000, her total transfer would be $139,000—still less than Beatrice’s total Medicare transfer—are her annual transfer would $4,600. The major driving factor is simply that Medicaid isn’t that generous.)

The moral of the story is that if you follow the money, almost everyone is a freeloader; by this criterion, there’s no meaningful distinction between Social Security and Medicare, on the one hand, and welfare programs, on the other hand.

But from my perspective, neither Alice nor Beatrice is a freeloader. The right way to look at Social Security, Medicare, and Medicaid, in my opinion, is as insurance programs. They protect people against risks that may not materialize until decades in the future (unemployment, disability, death of a spouse, poor health, health care inflation, etc.). When Alice and Beatrice entered the workforce at age twenty-five, neither one could know which of the two would lose her job thirty years later, so they both benefit equally from the existence of Medicaid. I guess if someone never has any intention of working but plans to simply live off of welfare programs you could call her a freeloader, but given the paucity of the current safety net I don’t think that’s a viable strategy in this country.

As I wrote in yesterday’s post, Americans like the things that government spends money on, but they claim not to like government, which leads to our current political mess. In White House Burning, we argue that providing social insurance is an essential and valuable function of the federal government. If people realize that the government’s principal activity is protecting them against long-term risks through programs that they already like, they may change their opinions of the government and their willingness to pay for it. We can all dream.

* I have not read the book, but I did read the paper.

** In 2010, general revenue contributions to Medicare were $213 billion, which is 16 percent of total tax revenues, excluding payroll taxes, of $1,298 billion. Those figures are from the OMB Fiscal Year 2012 budget, Historical Tables, Tables 2.1 and 13.1.

*** In 2010, federal spending on Medicaid was $273 billion. That’s from Table 11.3.

**** Total Medicaid spending in 2009 was $251 billion (Table 11.3). Long-term care spending was $122 billion.

***** It is appropriate to subtract out Medicaid long-term care benefits because Medicaid is the long-term care safety net for Medicare beneficiaries, so the value of those benefits is the same for Medicaid and Medicare enrollees.


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