The Efficient Safety Net: Better System, Same Budget

by | Aug 28, 2019 | Policy, US Policy

In engineering, someone will ask how you can save money and improve a system. This seems weird because generally improvements cost money, so how are you supposed to make things better for less money. Generally, the answer is efficiency. You either rearrange the system so things flow smoother or you invest in something that is much more efficient the previous machine saving you money in the long run.

So, can we improve our benefit structure to make it better and cheaper? The short answer yes, the current programs can be structured so that they nearly eliminate poverty, encourage work, reward marriage and community collaboration, are more equitable, and save money. This is without changing the tax structure whatsoever, though it is similar to my expanding the EITC article. For the long answer see below, but first a quick illustration on how a new welfare and entitlement program can help revitalize a city.

The Poor 10,000 Person Town: A Case Study

The best way to illustrate how restructuring these benefits would not only virtually eliminate poverty and encourage work, but also expand opportunity and equality is to examine how these programs would affect a poor town/neighborhood.

I will assume the population of this town/neighborhood is 10,000. In this neighborhood, we will assume that every adult under 65 only makes enough money to get the maximum new EITC benefit, meaning that each adult under 65 on average only makes $3,382 / year. We will assume that each person over 65 receives the full new social security benefit.

There would be about 6,000 adults under 65 based on the census data and they would only earn about $21 million. However, they would have good health insurance, money for food, and another $21 million from the new EITC. There would be about 2400 children and they also would have good health insurance, decent meals everyday, and bring in about $8.1 million from the new CTC. There would be about 1600 seniors and they also would have good insurance and bring in almost $20 million into the neighborhood from the new Social Security.

The government welfare and entitlement programs would inject almost $80 million and almost $28 million respectively into this neighborhood. With the $20 million that would have to be earned to get these credits this poor neighborhood would have at least $127.8 million circulating every year. This would create jobs which would raise the average earned income and expand the local economy, attract businesses especially grocery stores and clinics (SNAP and medical insurance guarantee a steady revenue source for them), and provide a good tax base so that services like schools and libraries could be well funded. All while reducing the amount of government aid needed.

The Current System

The Main Welfare Programs

Image by Adrian Mangel © The Balance 2019

Two Entitlement Programs

Total Costs

The current Welfare System costs the federal government about $768 billion dollars with most of the benefits going to the poor, a significant amount goes to the middle class, and only a small bit (mostly from the CTC) goes to upper income families. Another approximately $250 billion is spent by the States mostly for Medicaid.

The current Entitlement system costs the federal government $1.527 trillion with most of it being paid for by payroll taxes on the working population, but a significantly large portion is paid by general revenue funds.

Objectives in a New System

  • Ensure households with Two Working adults and 0 – 3 children are virtually out of poverty.
  • Eliminate Extreme Poverty
  • Dramatically Reduce Child Poverty.
  • Virtually Eliminate Elderly Poverty.
  • Provide a safety net for the disabled.
  • Encourage everyone to work.
  • Remove disincentives to work.
  • Eliminate inefficiencies in the old system.
  • Reduce Medical Costs.
  • Make sure health insurance takes up only 10%-15% of most people’s income.

The New System

New Welfare

Combine all the money for all anti-poverty programs into the new EITC, new CTC, and new SNAP. Change medicaid to a subsidy program that supports the public option and other marketplace insurance.

  • New EITC
    • The government matches 1 for 1 for every dollar you earn up to 1/5 of the poverty line for 2 working adults (1/5*$16,910 = $3382).
    • Phase out 20 cents for every dollar earned over $25,000.
  • New CTC
    • Fully refundable Child credit equal to the EITC for up to 3 kids.
    • Start phase out after the EITC is fully phased out ~($42,000).
    • Phase out at 15 cents for every dollar over $42,000.
  • New SNAP
    • $100 / month for up to 4 members of a household.
    • Use the same phase in and phase out standards as the EITC.
  • New Medical System
    • Create a public option with benefits that average $5,000 per adult and $4,000 per child.
    • Subsidize each household so that if they fully qualify for the EITC no more than 10% of their income goes to medical insurance.
    • Use the cost of the public option as the guide, meaning you don’t increase your subsidy with more expensive insurance, but you can reduce your costs by choosing cheaper insurance.
    • Phases out the subsidy with the EITC so that when you no longer qualify for the EITC 15% of your income can go to insurance.
    • Cap subsidy at 2 adults and 2 children ($18,000).

New Entitlements

Change social security from an income replacement program to an antipoverty one and give each senior who worked 30 years regardless of income exactly the poverty level for seniors. Prorate it by years worked, but reduce it very slowly. Transform, Medicare into a supplemental insurance program that pays for people over 65 and those with disabilities and is specifically catered for their unique needs.

  • New Social Security
    • Standard benefit of the 1 adult poverty threshold ($12,490).
    • Full benefits at 30 years of work, prorate accordingly.
    • Disabled people are evaluated every year.
    • Survivors can only get up to 90% of benefits.
    • Can get EITC or SNAP when receiving benefits.
  • New Medicare
    • Everyone over 65 and certain disabled or high risk people are eligible.
    • No premiums.
    • Benefits average $5,000 per person.
    • Can only be used as a supplement, must have normal insurance.

Costs of the New System

I calculated the costs of my new system below. These are rough, but conservative calculations. For instance I didn’t calculate a true phaseout or calculate the effects of the caps. The actual costs should be around these figures, but almost always lower. The Excel files I used to calculate these figures are available in the GitHub accessible through my portfolio.

The New EITC system would cost ~$210 billion and cover ~90 million American adults.

The new SNAP system would cost ~$85 billion and cover ~90 million adults and ~$32 million kids.

The New CTC would cost ~$123 billion and benefit ~86% of all households.

The new Medicaid would cost ~$391 million benefit ~100 million adults and could fully pay for more than half the kids in the US (~35 million).

The New Social Security system would cost ~$756 billion and support the same ~63 million people.

The new Medicare system would cost only ~$300 billion and support the same ~60 million people.

Differences Between the Systems

The total cost of the new welfare system comes in around $809 billion which is a little more than the $768 billion the government currently spends on welfare. The total cost of the new entitlement system is ~$1.056 trillion a staggering over $500 billion decrease from our current system.

The biggest increase was the EITC which absorbed all the other programs and increased by over $130 billion. However, it now covers almost a third of the population and pays significant benefits. The other big increase is in SNAP which increased by about ~$16 billion, but its reach dramatically expanded.

The other antipoverty programs aimed at specific things like housing or the disabled, but by converting that to a larger EITC the benefits can be more widespread and efficient.

The biggest declines were in Social Security and Medicare whose budgets dropped ~$180 billion and ~ $282 billion respectively. These changes are the results of benefit cuts; however, for social security this will result in a bigger benefit to the poor both during their working and retired years as the pay structure is no longer based on income. The Medicare cuts seem dramatic, but each senior will have a $10,000 worth of medical insurance between the Medicaid and Medicare which should be more than enough.

Discussion

Entitlement Reform

Reigning in Social Security and Medicare costs is essential to balancing the United State’s federal budget. Setting a cost target and then using actuaries to determine the benefits would lower Medicare costs dramatically. The benefits wouldn’t necessarily get worse either they would just be more targeted and as a result more cost effective.

Changing social security from an income replacement to an anti-poverty program would not only save money, but also help out those who need it most. Instead of those who richer getting more money in benefits from the working class (since they are the ones who pay the majority of the payroll taxes) all seniors would get a benefit that is guaranteed to keep them out of poverty and well above poverty if they decide to live with others be they a spouse, family, or just friends.

Welfare Reform

Dramatically expanding the EITC solves the main problem with poverty the lack of money. Matching 1 for 1 every dollar earned solves the anti-work stigma since you can only get money if you work. Furthermore, setting the benefit at 1/5 of the poverty line for 2 encourages Americans to work together when they are in dire straights and its cheaper to boot. If 2 adults whether they be spouses or simply roommates both worked just earned enough to get the max credit they would be 4/5 out of poverty and if you tack on the SNAP benefits they are almost completely out with minimal burden. It would take 933 combined hours of work or 466 hours of work each at the current minimum wage of $7.25 an hour to make enough to get the max EITC.

The child credit and SNAP benefit for children dramatically reduces the financial burden of children. For example if 2 adults had a child they would receive $3382 from the child credit and an additional $900 from SNAP. The poverty line for a household of 3 is $21,339, Assuming the adults already make $16,910 (the poverty line for 2 adults), the benefits the child brings in would be $4,282 bringing their household income up to $21,192. The poverty line for 3 is $21,339 meaning they are only $147 below the line or an additional 20 hours of work at minimum wage.

These plans encourage work and marriage or collaboration with your family and/or community. Single adults and parents living alone would still struggle; however, they could be easily targeted by charity groups who could help them put their benefits to good use. Seniors could also stretch their benefits much further if they choose to live with other people. Sharing costs with just one other adult dramatically reduces the amount of money you need to bring in to stave off poverty and it also dramatically reduces the amount of taxpayer money needed to combat poverty.

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