The most striking feature of the U.S. economy over the last three decades has been the upward redistribution of income. The top 1.0 percent of households has managed to pocket the vast majority of gains over this period. That is a sharp contrast with the three decades immediately following World War II when the benefits of much more rapid growth were broadly shared.
This pattern of growth might lead people to question the policies that have led to this upward redistribution (e.g. trade policy, labor policy, monetary policy, and anti-trust policy). In order to prevent such questioning and to further the process of upward redistribution many wealthy people have sought to focus public attention on programs that benefit the middle class and/or poor.
Peter Peterson, the Wall Street investment banker, has been most visible in this effort, committing over $1 billion of his fortune for this purpose. Recently he enlisted a group of CEOs in his organization, Fix the Debt, which quite explicitly hopes to divert concerns over income inequality into concerns over generational inequality. It argues that programs like Social Security and Medicare, whose direct beneficiaries are disproportionately elderly, are taking resources from the young.
It is easy to show the absurdity of this position. The amount of money that the young stand to lose from the upward redistribution of income is an order of magnitude larger than whatever hit to their after-tax income they might face due to the continuing drop in the ratio of workers to retirees. Also, older people generally have families. This means that when we cut the Social Security or Medicare benefits of middle and lower income beneficiaries, we are often creating a gap that will be filled from the income of their children.
Nonetheless, when you have a billion dollars to throw around, you will have plenty of people willing to argue absurd positions. Therefore, it is not surprising to see the Fix the Debt crew and various other Peterson derivative organizations pushing the line about generational conflict, but what is NPR's excuse?
It ran a piece under the headline "Old Triumph Over Young in Federal Spending and Sequester Makes It Worse." While the piece does include comments from supporters of Social Security and Medicare, the basic framing of the piece is just wrong. It tells listeners:
"But while it's true that cutting a dollar in Social Security won't send that dollar straight to the Head Start account, such programs are inevitably competing at a time of limited federal resources."
Is that a fact? This statement is asserting that the amount of federal resources is fixed regardless of what we do with the money. In other words, the idea is that the money we get from Social Security and Medicare taxes is independent of what we pay out for these programs.
That could be true, but that is a very strong assertion. Would we still be able to take 12.4 percent out of workers' paychecks for Social Security (combining employer and employees' contributions) even if we shut down Social Security altogether? My guess is no, but NPR told listeners that the amount of money we collect for Social Security and Medicare is fixed regardless of what we do with it.
Of course, instead of casting the old against the young, NPR could have, with at least as much accuracy, said that "Rich Triumph Over Young in Federal Spending and Sequester Makes It Worse." After all, the government pays out more than 1.0 percent of GDP in interest on its debt each year. This money goes disproportionately to the wealthy. Also, no one is proposing to cut interest payments in the sequester.
Interest payments are the most rapidly rising component of federal spending. CBO projects that interest payments will rise to 3.0 percent of GDP by 2023. The increase is even larger if we deduct the money refunded by the Fed from the interest earnings on the bonds it holds. The Fed's refunds are projected to fall from more than 0.5 percent of GDP in 2013 to just 0.2 percent of GDP in 2023, causing the net interest burden to rise from 0.5 percent of GDP at present to 2.8 percent of GDP in 2023.
Readers will rightly point out that rich people would not lend money to the government, or at least not at the same interest rate, if the government did not honor its interest obligations. This is undoubtedly true. But in the same vein, voters are likely to be less supportive of payroll taxes and workers may be more inclined to evade them, if they do not feel the benefits from these programs are worth the cost.
NPR has implicitly assumed that the income for these programs will not be affected by whether the government uses the money for these programs. As a practical matter, using standard discount rates, current retirees are projected to get somewhat less in Social Security benefits than what they paid in. Medicare is projected to pay out somewhat more than what was collected in designated taxes, but this is because of the high prices that the United States pays providers like doctors, drug companies and medical supply companies. If providers received compensation comparable to what their counterparts receive in other wealthy countries than the discounted value of Medicare benefits would be close to what is paid into the program in designated taxes.
One other point that is worth making in terms of the potential to cut these programs: The Fix the Debt crew and their allies repeatedly talk about cutting benefits going to affluent elderly. This is basically a joke because there are very few elderly that would fit conventional definitions of "affluent." When it came to tax increases, the bar was set at $400k, an income level that would likely be exceeded by just 0.2-0.3 percent of Social Security or Medicare beneficiaries.
A small number of very rich people have a hugely disproportionate share of income, which means that we can raise a substantial amount of money by taxing them. By contrast, the benefits of the very wealthy are pretty much the same as the benefits for everyone else. (Their Social Security benefits will likely be somewhat larger than the median, but since the benefit will be subject to income tax, most of this difference will be eliminated on after-tax basis.) This means that if the affluent are 0.2-0.3 percent of beneficiaries, then we can only hope to save 0.2-0.3 percent of spending on these programs by cutting their benefits.
In order to save substantial amounts of money on Medicare and Social Security it would be necessary to cut benefits for people with incomes in the range of $50k-$60k, levels that are very much middle class by normal standards.