THE FATAL FLAW IN SOCIAL SECURITY AND MEDICARE
by Mark Skousen

At the World Money Show in Orlando during the first week of February, I asked an audience of several hundred investors, "By a show of hands, how many of you are on Social Security and Medicare?" Over half the audience raised their hand.

Then, I asked, "How many of you are on food stamps?"

Every hand came down.

My point was simple. The food stamp is a social welfare program limited to the low-income individuals and families. A family of four qualifies for food stamps only if they earn less than $24,516 a year. There's a means test to qualify, and most Americans attending investment conferences don't need food stamps.

On the other hand, Social Security and Medicare are universal social insurance plans, and there's the rub. All workers pay into the programs, and at age 65 (sometimes earlier) they all qualify for benefits, even though most Americans can afford their own retirement program and private health insurance. In short, both government programs duplicate private alternatives for most Americans. Bill Gates - and most of you reading this column - have been successful enough to not need Social Security and Medicare.

I asked the audience, "By the show of hands, how many of you really need Social Security and Medicare to live on?"

Not a single hand went up.

But one of the retirees responded, "Yes, but we paid FICA taxes all our lives. We earned it!"

True enough. But the real question is: can we afford to continue such an expensive government program? Should we pay for Bill Gates' retirement and medical bills?

The main reason Social Security and Medicare are so expensive, wasteful and a political hot potato, is precisely because they are universal programs, available to all elderly citizens, irrespective of their financial status. As a result, the number of participants and the cost of these programs rise every year. For example, outlays for Social Security rose 47.5% in the past ten years, 67.9% for Medicare. The number of participants climbs unabated, now exceeding 50 million retirees.

Not so with food stamps. Because of means testing, the food stamp program has far fewer problems. Over the past ten years, the cost to the taxpayer has been relatively stable, despite efforts by the Department of Agriculture to sign up more people on food stamps.

In fact, the budget and level of participation of this federal program actually declined between 1994 and 2001. The number of food-stamp participants dropped from 27.5 million in 1994 to 19.1 million in 2001. The cost fell from $24.5 billion to $17.8 billion during the same period. Many analysts claim the decline is due to the Welfare Reform Act of 1996, but note that the decline began before the act was implemented.

Because of the recent recession, however, the number of users has increased to 23.9 million at a cost of $27.0 billion in 2004, yet still a manageable figure compared to the gigantic cost increases of Social Security and Medicare.

The following table shows the stark contract between the food stamp program and Social Security and Medicare.

And that brings me to the fundamental flaw and the ultimate solution regarding our two most expensive social programs: Social Security and Medicare violate the "welfare principle" in economics, while the food stamp program does not.

The welfare principle forms the fundamental basis of all charitable work in churches and other private organizations: assist those who need help, and equally important, don't assist individuals who can take care of themselves. To do otherwise only destroys personal initiative and independence, and encourages unnecessary expenses and inefficiency.

Imagine if the Red Cross gave blood to everyone, whether you needed it or not. Imagine if the Salvation Army fed everyone at Thanksgiving, and not just the needy. Imagine if your minister decided to pay for food, rent and transportation of all members of the congregation, not just the poor. These liberal programs would overwhelm the charities.

Think back to the November elections, or any presidential election in the 1980s and the 1990s. Did any presidential candidate make an issue out of the food stamp program? No. Yet every candidate talked endlessly about the Social Security and the health crises. Why? Because Social Security and Medicare are universal social programs, and food stamps are not.

It's time we apply this sound economic concept to the federal government. Government welfare programs - if they should exist at all - should be limited to those who really need assistance. They should be safety nets, not dragnets that capture everyone and make them wards of the state.

The solution is simple: Impose a means test on Social Security and Medicare.

No doubt if President Franklin Delano Roosevelt had conceived of Social Security in 1935 as a retirement plan for only the less fortunate who could not plan ahead financially, it would be a relatively inexpensive welfare plan today, and certainly would not require FICA taxes exceeding 10%. If President Lyndon Johnson had proposed a supplemental medical/hospital plan along the lines of the food stamp program, with strict means testing, taxpayers would be paying a lot less than 2.9% out of their pockets for Medicare. (Medicaid is a means tested program, but is administered by the states and has little accountability.)

Imagine if President Johnson pushed through Congress a plan called "Food Care" to make the food stamp program universal, so that everyone qualified for food stamps and pays for the program through a special "Food Care" withholding tax on wages. What effect would this universal "Food Care" plan have? Would we not face unprecedented costs, red tape, abuse, and powerful vested interests lobbying for better, more comprehensive "Food Care"? Would not the cost of food skyrocket? And suppose "Food Care" did not cover snacks - wouldn't AARP and other lobbying groups demand that the government cover snacks because their costs were rising too fast? Ludwig von Mises was right: "Middle of the road policies lead to socialism."

Fortunately, there is no nightmarish "Food Care" program. Granted there has been abuses and waste in the food stamp program, but the problems of efficiency are few compared to Medicare, all because of a simple means test.

I believe means testing is the best and simplest solution to the Social Security crisis. Means testing is superior to all the other solutions, including raising the qualifying age, or reducing monthly Social Security checks. There would be no transition costs as there would be with privatization. With means testing (measured by one's income tax return each year, including tax-exempt income), we could reverse the cost of these programs and eliminate the projected future deficits. And most importantly, means testing would reduce the number of dependents on Social Security and Medicare to only those who really need it. Ultimately, as more Americans become financial secure with their private pensions and insurance plans, we could even see the day when the payroll tax could be reduced to a reasonable level.

Regards,

Mark Skousen
for The Daily Reckoning

Editor's Note: Mark Skousen is editor of "Forecasts & Strategies" (www.markskousen.com), and a professor of economics at Columbia University. He is the author of 20 books. He is the producer of FreedomFest (www.freedomfest.com).

Mark Skousen is the author of many books, including The Making Of Modern Economics, an illustrated entertaining history of the great economic thinkers from Adam Smith to Milton Friedman.