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America’s Redistributive Welfare State

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from the magazine

America’s Redistributive Welfare State

Contrary to popular belief, government provides more aid to the poor in the U.S. than in Europe. Winter 2022
Politics and law
The Social Order

As part of a recent study on income disparities, Thomas Blanchet, Lucas Chancel, and Amory Gethin of the World Inequality Lab at the Paris School of Economics found that the United States “stands out as the country that redistributes the greatest fraction of national income to the bottom 50 percent.” This is not the American welfare state’s traditional reputation and seems to have come as a surprise to the left-leaning authors. How can it be so?

Government spending accounts for a smaller share of national income in the United States (35 percent) than in Europe (47 percent), but rates of public spending on education, health care, and benefits for the poor and disabled are similar. The greater cost of government in Europe results largely from its spending 11 percent more of national income on public pensions than the United States—which serves to crowd out private pensions that higher earners would have provided for themselves. To finance these state pensions, Europe imposes payroll and sales taxes at rates twice as high as in the United States. These additional taxes fall heavily on lower-income groups—making government bigger, while imposing higher costs on the poor.

Because raising taxes is unpopular, politicians normally prioritize spending. For this reason, the U.S. established Medicaid, Medicare, Social Security, and various welfare benefits as safety nets. The middle class is expected to provide for its own health insurance through employment and most of its retirement through homeownership, private pensions, 401(k)s, and other investments.

In the early twentieth century, Europe’s welfare state was built along similar lines, through a combination of employer-sponsored benefits, private insurance, and public assistance targeted at the needy. But World War II crashed the continent’s private pension and insurance systems, forced the rationing of basic goods and services, and led governments to establish universal entitlements to provide for all citizens, regardless of their circumstances.

When Britain extended eligibility for state pensions and health-care services to the middle class, it did not increase funding proportionately. As a result, cash-benefit levels declined and the quality of medical services deteriorated—leaving the poor, who were already previously covered, worse off. The working class, which had not paid income taxes prior to the war, found itself paying for much of the expansion. Other European nations, such as France and Belgium, which enacted equivalent reforms to universalize entitlements at the end of the war, saw a similar effect.

For a while, the cost of the shift was masked by the rebound of ruined economies in the immediate postwar era. But over time, the expense of providing generous retirement benefits and comprehensive health-care services to all ballooned—tilting the bulk of government spending toward middle-class entitlements and eclipsing other spending priorities. France spends a much larger share of GDP (13.6 percent) on public pensions than does the United States (7.1 percent), owing to a lower retirement age (62 vs. 66) and disproportionately generous benefits for wealthier seniors. Yet, as 69 percent of American seniors receive private retirement benefits, incomes from private pensions in the U.S. (5.3 percent of GDP) are much higher than in France (0.3 percent), and the median disposable income of over-65s in the United States ($38,920) is also much higher than in France ($23,490).

Blanchet, Chancel, and Gethin make much of the fact that income is more unequally distributed in the U.S. than in Europe. The United States does not have greater inequality because it has more poor people, however, but because its nonpoor earn much more. In 2017, after adjusting for differences in the cost of living, only 19 percent of Americans lived in households with disposable incomes less than $20,000, compared with 22 percent in Germany, 27 percent in the United Kingdom, and 53 percent in Italy. By contrast, while 32 percent of Americans enjoyed disposable incomes greater than $50,000, only 12 percent of Germans, 12 percent of Britons, and 4 percent of Italians did so. Americans live in houses that are, on average, twice as large as those of Europeans. Indeed, the average resident of France, Germany, or Britain has less living space than the poorest quintile of Americans. Rates of homelessness are also substantially lower in the U.S. than in France, Germany, or the U.K. Only 3 percent of the U.S. population was undernourished in 2016, the same as in the E.U.

The swelling of Europe’s welfare states mostly imposes additional costs on those with modest incomes, rather than the rich—of which it has many fewer than the United States. While the richest 1 percent pay about 33 percent of their income in taxes in the U.S. and 35 percent in Europe, residents with below-average incomes pay much less in tax in the U.S. (16 percent) than in Europe (28 percent).

The United States has the highest levels of disposable income among G7 countries for nine out of 10 income deciles. Such comparisons give the impression that the poorest decile is little better off in the United States than in Europe. But the U.S. relies heavily on in-kind benefits, which traditional income statistics don’t count, to assist its neediest citizens. In 2018, American families with children below the poverty line averaged posttax earnings of $18,148—in addition to which government programs provided an average of $20,757 in cash, food, and housing benefits, along with $4,967 in child care and services and $14,960 in health-care benefits.

Blanchet, Chancel, and Gethin note that government spending on health care in the United States and Europe accounts for a similar share of GDP. However, American entitlements to health care are largely reserved for the elderly, disabled, and poor through Medicare and Medicaid, which covers 34 percent of the population. Health care for middle-class families is typically paid for privately through employer-sponsored insurance. When government and private-sector spending are included, the U.S. spends a total of 17 percent of GDP on health care, compared with 10 percent in the E.U.

Government budgets under single-payer health-care systems must be stretched to cover all, which typically leaves them short of funds for the costliest services. Britain’s National Health Service refuses to cover medical interventions that cost more than $40,000 per year of life saved. As a result, the sickest patients are often denied access to newly developed drugs or are treated with outdated equipment when major surgery is required. Even when procedures are nominally covered, a shortage of funds means that patients are regularly unable to make timely appointments with specialists for cancer care or forced to wait months for essential surgery.

America’s health-care system is therefore remarkably progressive in its financing and at ensuring better access to care. The 82 million low-income Americans covered by Medicaid in 2019 paid no premiums, deductibles, or coinsurance for health-care services. Because insurance is generally comprehensive, the share of household consumption dedicated to out-of-pocket medical expenses is lower in the United States than in most other developed nations.

American health care can improve. Employer control of insurance makes plans unresponsive to individual needs, creates gaps in coverage when people move between jobs, and weakens the incentive for hospitals to control costs. These problems can and should be fixed. But throwing more money at health care, as with other social programs, tends to run into diminishing returns.

The welfare states facing the greatest struggles are those that rely on a single payer to finance all activities. The sovereign debt crises in Portugal, Ireland, Italy, Greece, and Spain were primarily due to the expansion of public pensions that largely replaced private retirement finance. Maintaining broad access to essential health-care services, as medical capacities develop and citizens live further into old age, is also likely to prove hardest for countries where the government is expected to provide these services to all.

Governments best help those in need when they limit benefits to them, rather than trying to provide for the entirety of society—an approach that requires everyone to pay higher taxes, including the poor.

Photo: jetcityimage/iStock

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