Thursday, September 20, 2012

The Welfare State Benefits the Better Off

You might be wondering how I am doing lots of posting this day, well my mom is out with some of her friends.

Anyway, in the Buttonwood column of the Economist, Philip Coggan points out that the welfare state benefits the well off more than the intended. (bold emphasis mine)

All this is well illustrated in Suzanne Mettler's book "The Submerged State", which shows how these hidden subsidies can distort voters' view of the way that government policy works; a 2008 poll found that 57% of Americans denied ever using a government programme. But when shown a list of 21 actual programmes, including student loans and home-mortgage interest deduction, 94% of the deniers turned out to have benefited after all.

Some of these programmes are heavily skewed towards the better-off. According to Ms Mettler, 69% of the benefits of the mortgage interest deduction went to those who earned $100,000 or more; 55% of the benefits from employer-provided retirement benefits* went to those earning $100,000 or more. Only 16% of workers in the lowest income quintile had employer-sponsored (and tax deductible) health insurance compared to 85% of those in the top quintile.

In cash terms, the average subsidy for those earning $200,000 to $500,000 is three times that for those earning $10,000 to $20,000.

And these programmes are large; mortgage-interest tax relief cost $104.5 billion in 2010 while the tax subsidy for retirement benefits was $67 billion. But these programmes are politically very hard to get rid of…

Universal benefits are very expensive. But targeting benefits requires means-testing, an instrusive process that causes hard cases at the margin. And restricting benefits to the poorest may weaken political support for the whole system, along the lines highlighted by Mr Romney; people may believe that the hard-working "us" are subsidising the feckless "them".

This just shows how the current system has been gamed by entrenched power blocs and through complicit political authorities/political class. 

Ever wonder why the welfare state is headed for a collapse?

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