July 16, 1997

Is This President Aiming to Turn Social Security into another Welfare Program?

How Much Will Clinton Increase Welfare to Defeat a Tax Cut?

President Clinton has a long history of opposing tax cuts. However, recently he has added a new wrinkle to his opposition -- the issue of "refundability" of payroll taxes. This is a radical step with implications far beyond the current tax debate. Essentially, the President's radical proposal would turn Social Security and Medicare into welfare programs for many Americans. How will this affect the entire program for the rest of Americans?

Refunding Social Security/Medicare Payroll Taxes Makes Them Welfare Programs

The Clinton White House is now proposing for the first time that the net tax cut figure ($85 billion over five years and $250 billion over ten years) reached in the budget agreement between the President and Congress May 2 include tax-cut money to pay for refunding some portion of the payroll taxes of those persons who already pay no income tax. Not only would this proposal break the budget agreement by decreasing the net tax cut and instead increasing social spending, but this as policy would be a radical break with the social contract that always has been the foundation of these social insurance programs.

If the tax-cut bill is enacted with the direct linkage to payroll taxes as per the President's urging, it effectively would end the "earned" entitlement aspect that has been the fundamental basis of such social insurance programs as Social Security, Medicare, and Unemployment Insurance since they were first created.

Earned Entitlements Versus Welfare

Since their inceptions, the programs cited above always have been financed by a flat payroll tax. The policy has been clear and consistent: In contrast to welfare programs, these were meant to be "earned" entitlements for which individuals paid during their working years. The Clinton refundability proposal would change these programs into "unearned" entitlements -- like welfare and Medicaid -- for many beneficiaries. Clinton's radical refundability proposal raises serious questions:

• Will his decision to turn Social Security and Medicare into "unearned" entitlements -- welfare -- for those who pay no income taxes endanger support for these programs?
• Will his proposal economically endanger these programs? -- Will the "refunds" come from the trust funds into which the payroll taxes were paid?
• Will his proposal mean altering the contribution period required for Social Security coverage? Currently, workers must contribute to the system for a required duration (40 work quarters) in order to be eligible -- the Clinton proposal would reduce and in some cases eliminate entirely the contribution.

What's Fair About This?

Further, while the President calls for this radical change in the name of "fairness," he fails to address the unfairness to all of the other taxpayers who would be required not only to continue to pay their own payroll taxes, but now also to subsidize the payroll taxes of those who already pay no income taxes, and who also already pay less than the full rate of their payroll taxes.

Payroll Taxes Form the Foundation for the Social Insurance Programs

Since their inceptions -- Social Security, and Unemployment Insurance in 1935, and Medicare in 1965 -- the major social insurance programs have been funded by payroll taxes levied on all workers' wages and paid jointly by employers and employees. The taxes have always been levied as fixed percentage rates on a specified amount of a worker's income as shown below.

Tax Employee Share Employer Share Income Covered

	Tax	Employee Share	Employer Share	Income Covered
Social Security	OASDI	6.2%	6.2%	$65,400*
Medicare	HI	1.45%	1.45%	Unlimited**
Unemployment	FUTA		0.8%	State determined***

* Income subject to tax is increased according to COLA adjustments.

** The income cap was removed in 1993.

*** Ranges from $7,000 of wages in 11 states to $26,000 in Hawaii.

Although both the taxes and the amount of income subject to the tax have been increased numerous times (the tax rate for Social Security was initially 1 percent in 1937 and 0.35 percent for Medicare in 1966; the taxable base for Social Security has been raised 31 times and 24 times for Medicare), the policy underlying these programs has been clear and consistent. These programs were intended and have always been contributory social insurance programs. Administered by the government, these programs were supposed to function similarly to standard insurance in which an individual contributes during his or her normal working years in order to receive benefits during emergency periods (unemployment) and upon retirement (Social Security and Medicare). In fact they were "earned entitlements" -- individuals and their employers contributing and the government guaranteeing a future benefit. These contrast with "unearned" or "pure" entitlements, such as welfare and Medicaid, instituted for those who could not contribute to their own needs.

The Redistributive Nature of the "Earned Entitlements"

One very significant difference between the payroll tax-financed programs like Social Security and standard insurance: the programs are heavily redistributive. Those at the lower incomes who contribute the least receive proportionally greater benefits -- a far greater return on their contributions than those who earned and contributed more. Just how redistributive the "earned" entitlements are is demonstrated by looking at the time it takes to recoup contributions.

According to the Congressional Research Service (CRS), assuming a worker retired in January 1996 at age 65 and had worked steadily since age 21, beneficiaries would recoup their Social Security contributions plus interest as follows:

	Employee Share	Employer/Employee Combined
Minimum wage earner	4.4 years	9.8 years
Average earner	6.3 years	14.2 years
Maximum earner	8.2 years	19.3 years

The Medicare portion is similarly redistributivc toward low-income contributors -- especially since 1994 when the cap on the amount of earnings subject to the tax was eliminated.

As the earlier section demonstrated, most workers pay 7.65 percent of their wages (counting only the employee share, as Clinton does in his proposal) in payroll taxes. However, factoring in the Earned Income Credit (EIC) entitlement program, we see that low-income workers pay a far lower percentage rate than this, as shown below:

Hypothetical Family of Four: Tax Year 1998

(Source: Joint Tax Committee)

AGI	EIC	Income Tax Owed 1	FICA 2	Total Tax Liability	Total as % of AGI
$17,000	$2,766	-$2,766	$1,301	-$1,465	-8.6%
$18,000	$2,555	-$2,555	$1,377	-$1,178	-6.5%
$19,000	$2,345	-$2,345	$1,454	-$891	-4.7%
$20,000	$2,134	-$2,134	$1,530	-$604	-3.0%
$21,000	$1,924	-$1,924	$1,607	-$317	-1.5%
$22,000	$1,713	-$1,713	$1,683	-$30	-0.1%
$23,000	$1,502	-$1,502	$1,760	$257	1.1%
$24,000	$1,292	-$1,292	$1,836	$544	2.2%
$25,000	$1,081	-$1,072	$1,913	$840	3.4%
$26,000	$871	-$712	$1,989	$1,277	4.9%
$27,000	$660	-$303	$2,066	$1,763	6.5%
$28,000	$449	$58	$2,142	$2,200	7.9%
$29,000	$239	$466	$2,219	$2,685	9.3%
$30,000	$28	$827	$2,295	$3,122	10.4%
$31,000	$0	$1,005	$2,372	$3,377	10.9%

¹ Assumes use of the maximum dependent care expense for two dependents.

² Employee share only.

• The Federal Poverty Level for a family of four is $16,050 in 1997, so none of the families listed above is among the federally defined "poor."
• Of these low-income families in the illustration above, on paper they begin to have income tax liability at $17,000.
• But, because of the EIC (which is a refundable credit, so these "taxpayers" are getting more money back than they owe in taxes), in reality, they receive money from the government all they way until they make over $22,000. And so, of these families, none has a true tax liability (income plus payroll).

-- This means that their contributions to the defense of our country, to the maintenance of highways and national parks, and education are all fully subsidized by the taxpayers.

-- And on top of that (because of the generosity of the EIC program), so are their Social Security and Medicare contributions.

• No such family has a total tax rate that matches even the base payroll tax rate of 7.65 percent (ignoring the employer share) until after $27,000.
• Every family listed above making $30,000 or less is at least partially subsidized for their contributions to Social Security and Medicare. Yet, Clinton wants more.

Clinton Erases the Line Between "Earned" and "Unearned" Entitlements

The Clinton refundability proposal is a radical departure from the past policy of contributory social insurance programs that has existed for over 60 years and through 10 presidential administrations. For millions of workers, the requirement that they contribute to their own future retirement and old-age health care costs would be lessened or entirely removed from them. Instead, it would be transferred to millions more middle-class workers, who already are not only contributing more than they receive in benefits from these programs, but would also begin picking up the cost of other workers. The Clinton refundability proposal explicitly would make Social Security and Medicare no different than welfare and Medicaid -- not only for those who would receive a full or partial subsidy, but also for those middle-class taxpayers who would have to assume the costs.

Refundability also raises broader questions about the extent the Clinton proposal strikes at the foundations of the programs.

• Would this unprecedented plan undermine public support for Social Security and Medicare?

-- Clinton's refundability proposal decidedly ends the line in the sand between these programs and welfare -- shared responsibility.

-- To get an idea of the potential impact of this radical change, just look at the much reduced level of support for "unearned" entitlement programs such as welfare and Medicaid.

• Will the refunded money come from the Social Security and Medicare trust funds?

-- Clinton has not said where the money will be withdrawn for his proposed refund.

-- By law, this money is deposited into Social Security and Medicare's respective trust funds. According to the trustees, these trust funds are already under severe financial pressure -- particularly Medicare (HI), which will be bankrupt in 2001.

-- It would not only be irresponsible but ironic if Clinton is proposing to remove the money from these trust funds -- particularly Medicare's when the budget agreement he reached with Congress is supposed to strengthen it.

• If this money doesn't come from the trust funds, it must come from middle-class taxpayers.

-- If so, this means that the average middle-class taxpayers will be paying twice for these programs -- first for their own Social Security and Medicare benefits, and then for some, and in many cases all, of these other individuals' future benefits.

• What does this mean for those whose payroll taxes are refunded?

-- Both Medicare and Social Security currently require that individuals contribute to the systems for 40 work quarters.

-- Since many of these individuals will no longer be contributing at all and the rest only making partial contributions, will their contribution requirement be altered?

Clinton's Refundability Proposal Just Means More Welfare

Unlike his past opposition to tax cuts, President Clinton's proposal to refund payroll taxes is a radical step. It destroys the contributory element -- the fundamental policy foundation -- of both Social Security and Medicare. As such it raises serious questions as to the future function of these programs. Will they remain as they have been for over 60 years -- "earned" entitlement programs where responsibility for their maintenance is shared by all prospective beneficiaries -- or will they become "unearned" entitlements such as welfare and Medicaid where beneficiaries bear less or no responsibility for contributing to their own benefits?

Unlike his support for increased welfare spending in the budget agreement he reached with Congress ($14.2 billion), President Clinton's proposal to refund payroll taxes is a dramatic expansion of welfare policy into government programs. Social Security is the largest federal program, while Medicare is the third largest. Increasing entitlement spending already threatens America's fiscal future. Establishing the precedent that welfare spending -- with its underlying principle that beneficiaries make no or only a partial contribution for the benefits they receive -- should extend into these areas only further exacerbates the serious financial problem we already face.

Clinton's Solid Record of Opposition to Tax Cuts

President Clinton's opposition to tax cuts is clear: Not only has he opposed them in general but he has worked consistently to minimize the pending proposal. Despite promising a tax cut in his 1992 campaign, he raised taxes $240 billion in 1993 -- the largest tax hike in U.S. history, he tried to raise them $289 billion in 1994 to pay for his nationalized health care program, and he vetoed a tax cut in 1995.

During this year's negotiations with Congress he insisted on minimizing the tax cut -- limiting it to just $85 billion over five years. Since agreeing to that figure, he has further sought to minimize it by pushing for further spending programs (such as $8 billion more than the agreed to amount for uninsured children) and by trying to undercut support for it by falsely claiming that it only benefits the wealthy.

Now, however, his opposition has taken a new twist by claiming that the tax cut should be a "refundable credit."

Clinton's Solid Record of Wanting to Increase Welfare Spending

The President first vetoed the welfare bill last year, and only later signed it with a wink and nod. Now we know why. He wasn't about to disappoint his base by allowing the monumental reforms to go through: this year, he explicitly requested additional welfare spending in the budget negotiations, essentially demanding that Congress undo the welfare reform law he had just signed. But so far, Congress has managed to preserve the fundamental reforms of that law, even while adding back $14 billion in welfare spending at the President's insistence. And, of that $14 billion in increased welfare spending, $10 billion is for noncitizens. As it now stand, the budget agreement will spend $1.2 trillion on welfare over the next five years. But, that's not enough for this President.

America's middle-class would be better off if President Clinton opposed a tax cut honestly than tried to increase welfare spending dishonestly. Instead, he is surreptitiously seeking to expand it even more -- and at the same time eliminate more of the tax cut he already has minimalized. While expanding welfare in this dangerous way, Clinton would deny the full $500-per-child tax credit to hardworking taxpaying families making as little as $60,000.