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The Middle Class and Its Entitlements

A Commentary By Froma Harrop

Tuesday, September 27, 2011

To what are Americans entitled? Government-guaranteed health coverage in old age? Government-guaranteed health coverage at any age? Subsidized housing if they're low income? Subsidized food? Subsidies for growing wheat but not making shoes? Subsidies for homeowning?

Answer these questions, and we may end the budget deficit crisis. The reluctance to properly label entitlements as such has created the widespread illusion that what government spends on others is "welfare" and what's spent on us is our due. Time to decide what we really want -- and pay for it.

The great entitlement-spending hole is Medicare, the government health plan for the elderly and disabled. Contrary to popular belief, most middle-class beneficiaries haven't "paid for it" through their payroll taxes and other contributions. A typical couple retiring in 2020 will have paid $100,000 in lifetime Medicare taxes but will receive about $500,000 in scheduled benefits over the premiums they pay into the program, according to tax-policy expert C. Eugene Steele.

Put another way, nearly 40 percent of Medicare's funding comes from general revenues, which means income taxes. That makes Medicare a government program that -- to be blunt in the conservative style -- transfers wealth from the productive class to retirees. If Medicare served only the poor, many politicians would refer to it as welfare without hesitation.

Sure, Medicare's soaring costs must be contained. But tremendous sums can be saved within the program by addressing the way doctors are paid. The new health care reform law starts that ball rolling.

But even though the reforms would reduce projected cost of Medicare, we will still need more tax revenues to preserve the program as we know it for growing numbers of older people. If Americans want a voucher system that spends a lot less on Medicare and basically brushes the elderly off onto private insurers, they can have it. In fact, the Republican-run House has already voted for one.

There are other middle-class entitlements. Take out a home mortgage, and you can subtract your interest payments from taxable income. (By the way, Canada doesn't allow for such deductions, and its level of home ownership is close to ours.) The higher your income, the more valuable the tax break. Meanwhile, the taxes you save must be made up by others -- people who rent their homes, don't have mortgages or don't itemize on their tax returns.

The biggest farm subsidies go to wealthy investors. Call that a form of welfare, and its defenders will find a salt-of-the-earth farmer to insist that he's not on welfare -- he's producing something. But American toy companies make things, too, and they're not getting government checks because global toy prices have dropped (or even when they have risen).

That's not to say that we don't want some of these entitlements. The deduction for mortgage interest should be kept for struggling middle-class homeowners, at least for now. But we could start phasing it out on mega-mortgages approaching $1 million.

Some programs for the poor are essential to maintaining a humane society, but others may be inefficient or socially counterproductive. Look at them, too, but bear in mind that they are not the big kahuna of entitlement spending.

Medicare is, and if Americans want it to retain something resembling the first-class coverage now offered, they will have to pay more in taxes.

Let the games begin on who will do the paying, but be mindful that the reckless tax-cutting of the George W. Bush years has helped send federal tax revenues to historic lows relative to the economy. And the recent dramatics over asking anyone to pay $1 more in taxes are about little more than this: forcing America to dismantle the king of middle-class entitlements.

COPYRIGHT 2011 THE PROVIDENCE JOURNAL CO.

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