Subsidies and Social Welfare
Subsidies
Government financial support of a program, industry, or group of individuals
TYPES OF SUBSIDIES:
Cash (Temporary Assistance for Needy Families)
Tax Incentives (tax deductions for home mortgage interest payments,
child care, etc.)
Credit (Veterans’ Administration home loans)
Benefit-in-kind (nonmonetary) (food stamps, Medicaid, Medicare)
Purpose of Subsidies
To encourage a particular type of private sector action
John Locke: Property ownership leads to successful society. Government encourages home ownership
through mortgage exemptions; Homestead Act
Subsidies associated with welfare; in fact, most go to people in top half of income distribution
Many go to corporations (liberals criticize as “corporate welfare), such as tax breaks for
pharmaceutical corps w/operations in Puerto Rico
Politics of Subsidies
Most Americans complain about subsidies; however, most receive them in one form or another
Once established, difficult to eliminate (iron triangles) or issue networks develop to protect
Some even become “sacred cows” – Social Security referred to as “third rail” of American politics –
just ask Dubya and Karl Rove!
Hard to eliminate because often hard to “see” –dairy subsidies, for instance, are very, very low on
public radar – therefore, who will complain?
Commerce-Promoting Subsidies
Oil companies receive tax breaks to encourage oil production, make us less dependent on foreign oil
Airlines received billions in federal aid post-9/11; federal agency took over United Airlines pension
program in 2005 to forestall bankruptcy
“Crop support payments:” Loans and cash provided to farmers; farmers sometimes also paid not to
grow to prevent surpluses. Criticisms: increases costs of food; should we pay farmers not to grow
when worldwide food shortage exists?; 30% of subsidies go not to small farmers but
“agribusinesses,”– corporate welfare?
Social Welfare Subsidies
Social Security: for elderly, survivors, and disabled
No means test: everyone in 3 categories benefits, regardless of income
Funded by FICA (Federal Insurance Contribution Act) payroll tax: 6.2% of first $97,500 of
earnings, matched by employer
Medicare: Federal medical coverage for elderly; financed by payroll tax of 1.45%; no means test
Social Welfare Subsidies (cont.)
Unemployment Insurance: payments to unemployed (if actively seeking work); averages 40% of prior
pay for 26-week max; no means test
Temporary Assistance to Needy Families (TANF): commonly referred to as “welfare;” payments to
poor families WITH CHILDREN; means test
Supplemental Security Income: Cash payment to disabled people below certain income level; means test
Food Stamps: coupons given to poor to buy food; means test
Medicaid: Federal medical coverage for TANF & SSI recipients; means test
The Social Security Debate
Demographic problems: increasing birth rate during Baby Boom era; declining birth rate since then;
increased life expectancy due to medical advances
When SSA began in 1935, there were 16 people working for every 1 recipient. Ratio now: 3:1.
Projected 2020 ratio: 2:1. Huge surplus now existing in Social Security Trust Fund will dwindle away
until, without reform, more money will be going out than coming in.
So, GET AN IRA, the gift that keeps on giving!
Proposed Social Security Reforms
Increasing retirement age from 65 to 67 or 70
Adopting means test for recipients
Reducing annual COLA (Cost of Living Adjustment) for recipients
(creates yearly benefits increase)
Reducing recipient benefit amounts
Increasing amount of income subject to SS tax
Privatizing part of SS deductions - allowing citizens to
earmark part of their contributions to their own choice in
investments in hopes of earning greater returns
The Welfare Debate
Welfare huge political issue for the two parties:
Republicans tied “welfare mess” to various social pathologies – higher rates of illegitimacy, singleparent families, crime, drug use, etc. Stressed welfare reform, claimed Dems blocked efforts
Dems responded with Clinton promise to “end welfare as we know it”
Huge welfare reform bill passed by GOP Congress & signed by Clinton in 1996: Personal Responsibility
& Work Opportunity Reconciliation Act (PRWORA)
PRWORA Highlights
Ended federal entitlement status of various welfare programs, increased state authority –federal
block grants & state matching funds
Limited welfare payments to five-year max
Welfare recipients must work within two years of applying for benefits
Food stamp recipients required to work
Prohibited aliens from receiving benefits (later changed to allow legal aliens to receive welfare)
Teen mothers required to live with parents & attend school to receive benefits