NCPA - National Center for Policy Analysis


June 20, 2005

Social insurance programs that are not means tested have a redistributive effect on income, but the benefits tend to accrue to high-income earners, says economist Martin Feldstein.

He cites three programs -- Social Security, Medicare and unemployment insurance. Each program imposes the same tax rate on all income earners, with the exception of Social Security's income ceiling on payroll taxes:

  • Social Security is designed to provide fewer benefits for high-income earners, however, the redistribution effect is offset by the longer life expectancy of high-income individuals, spousal benefits and the later age at which they begin to work and pay into the system.
  • Furthermore, the Social Security payroll tax reduces capital accumulation, which increases returns to capital, but decreases real wages.
  • Medicare rules are applied equally, yet high-income seniors receive more benefits than lower-income individuals; they live longer and take advantage of more screening tests and preventive measures, such as mammographies and diabetic eye exams.
  • Unemployment insurance has the same effect; in Massachusetts, for example, the state's generous unemployment benefits are paid from taxes on the first $10,800 in earnings, but benefits received can equal up to 50 percent of wages up to more than $50,000 per year.

In other words, an individual earning $50,000 per year pays the same tax rate as somebody earning $11,000 per year, but receives unemployment benefits nearly five times as high, says Feldstein.

Hence, if government's goal is to distribute more income to the poor, its social insurance programs, which cost $800 billion in 2003, are not doing the job.

Source: Martin Feldstein, "Rethinking Social Insurance," National Bureau of Economic Research, Working Paper 11250, March 2005.

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