Barro: In flap over 'Makers and Takers,' Ryan a faker

Rep.'s attacks on Obama's 'twist of terms' feature some twists of its own

Jan 25, 2013 @ 11:54 am

By Josh Barro

Entitlements, Paul Ryan, Barack Obama
+ Zoom
Ryan: Shadowboxing a straw man ((Photo: Bloomberg News))

In his second inaugural address, President Barack Obama took issue with the "makers versus takers" narrative put out by Republican politicians. Paul Ryan took issue with the president's characterization of his argument:

[E]arned entitlements, where you pay your payroll taxes to get a benefit when you retire like Social Security, Medicare, are not taker programs. And I think when the president does kind of a switcheroo like that, what he's trying to say is we are maligning these programs that people have earned throughout their working lives. And so, it's kind of a convenient twist of terms to try and shadowbox a straw man in order to win an argument by default.

The first problem with Ryan's statement is that he has, in fact, previously used a definition of "makers" and "takers" that includes the receipt of Social Security and Medicare benefits as "taking." As The Daily Show pointed out this week, Ryan has cited a Tax Foundation paper to say that between 60 and 70 percent of Americans get more in federal government benefits than they pay in taxes; that paper includes all federal government spending in its count. If you don't include those programs, you can't get to Ryan's conclusion that more than half of Americans are "takers."

But there's a second problem with Ryan's recent statement: Medicare is, by any reasonable measure, a "taker" program. It is not an "earned entitlement" like Social Security; while there is a payroll tax called "Medicare tax," Medicare benefits are substantially unlinked to taxes paid. If you or your spouse worked for at least 10 years, you're entitled to the full Medicare benefit, regardless of how much tax you paid.

Eugene Steuerle and Caleb Quakenbush at the Urban Institute have run the numbers and found that almost every American can expect to receive far more in Medicare benefits than he or she pays in Medicare taxes. A two-earner couple, both earning an average wage of $44,600 in 2012 and retiring in 2020, can expect to pay $153,000 in Medicare taxes over their lifetime and collect $427,000 worth of benefits. (Both tax and benefits figures are adjusted to a present value, meaning the calculation adjusts for the fact that taxes are paid years before benefits are received.)

This is true by design: Medicare tax was only ever intended to cover Medicare Part A, which covers inpatient care; Parts B and D, covering inpatient care and prescription drugs, are funded from general revenue, which means they are paid for by taxes such as the individual income tax.

Now, Ryan might argue that even if Medicare is not an earned entitlement, its universality makes it not a "taker" program: Most Americans can expect to spend part of their lives on Medicare and part of their lives working and paying taxes into the government's general fund, so it doesn't create a specific class of people dependent on the program.

But that would be wrong, because people with higher incomes pay a lot more in taxes to support all government functions, including Medicare, than those with lower incomes, while everyone gets the same Medicare benefit. In fact, because Medicare premiums are means-tested, those who paid the most into the system get the least out at the end. That is, Medicare is a progressive fiscal transfer, so by definition it creates "makers" and "takers."

Medicare is also an intergenerational transfer. People who are currently elderly had the good fortune to be working at a time when health care costs were relatively low and retirees relatively few, and to collect benefits when health care is expensive. The excellent deal enjoyed by the currently retired generation will be offset by an unfavorable fiscal deal for my generation. They take, I make.

The same is true of Social Security, though to a lesser extent. Unlike Medicare, Social Security benefits are approximately covered by specific taxes collected to finance the program. But while that is true across the population, it is not necessarily true for any specific beneficiary. The Social Security benefit formula is progressive, so people with low incomes can expect to get an excellent return on their payroll taxes, and people with high incomes can expect a poor return. Again, it's a fiscal transfer, creating makers and takers, even when individual beneficiaries are viewed over a lifetime.

Ryan has an obvious political prerogative to draw a false distinction that excludes Social Security and Medicare from fiscal transfer calculations: He wants to make clear to the Republican Party's aging base that when he talks about "takers," he means poor people, not old white people. It's the same political prerogative that leads Republicans to insist, absurdly, that Medicare faces a crisis requiring a massive structural overhaul and that we should make no changes to benefits for people currently over 55.

You might say that Ryan is twisting his argument in a way that allows him to offer "gifts" to his political base.

The truth, of course, is that redistributing income is one of the essential functions of the federal government. It's exactly what entitlement programs are for. And as pretax inequality rises, so will the number of people receiving benefits that outstrip the taxes they pay, even absent any policy change. In an environment of rising pretax inequality, the only way to hold the number of "takers" fixed is to adopt a less progressive fiscal policy. That would be an odd proposal, but it's also the Ryan proposal.

--Bloomberg News--

(Josh Barro is lead writer for the Ticker. E-mail him and follow him on Twitter. The views expressed are his own.)


What do you think?

View comments

Recommended for you

Related stories

Sponsored financial news

Upcoming Event

Apr 30


Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video


How to build a better business plan

Financial advisers are good at a lot of things, but business planning isn't always one of them. Why is that and how can they improve? Teri Shepherd of Carson Group offers some solutions.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

Trump rejects idea of new caps on 401(k) savings in tax plan

GOP reportedly had been considering reducing the cap on the annual amount workers can set aside for 401(k)s.

Finra's stats reveal an industry in decline

The broker-dealer regulator reports fewer entities under its watchful eye.

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print