Can Social Security, Medicare Be Considered Wealth?


Editor’s note: In our recent program ‘Do Social Safety Net Programs Shrink Gap in U.S. Economic Inequality?‘ – above – Paul Solman interviewed economist Robert Lerman about his take on wealth inequality in the United States. Lerman argued that programs such as Social Security and Medicare can reasonably be included in the definition of one’s wealth. And if it is, inequality between rich and poor Americans is actually less drastic. Many of you wrote in to question and express disagreement with his analysis. Today, we’ve given Lerman the Making Sen$e page to address some of these criticisms.

Responses to Comments on Social Security, Medicare and Inequality

By Robert Lerman

I respect NewsHour viewers’ voiced concerns about inequality. Indeed, I have spent much of my career working to make policies operate better for the less advantaged. Most recently, I’ve proposed a large scale home-ownership voucher program, an expanded apprenticeship system in the U.S., and an affordable 5-point plan to create four million jobs at a cost of about $50-55 billion.


That said, let me turn to the comments. Many respondents argue that claims to Social Security (mainly Old Age Insurance) and Medicare shouldn’t count as wealth and so don’t narrow the wealth gap. Like all economists, I see net worth or wealth as a stock of value that can be turned into a flow of future spending (or bequests and donations). Wealth can, for instance, be converted to a life annuity that pays an annual sum to individuals until they (and their spouse) die. In fact, the Social Security system provides such an annuity, one that rises with the cost of living.

Looking at wealth as an expected flow of payments like this, you might ask how much wealth you’d need to have an index-linked, lifetime annuity worth the same as Social Security to retirees and, often, their spouses? My colleague Eugene Steuerle, a leading Social Security expert, has run the numbers. For a married couple headed by an individual who worked for at least 35 years at average annual earnings, it’s $447,000.

Robert Lerman

My view of Social Security as wealth is neither unusual (for an economist anyway) nor politically conservative. For example, in 2005 the liberal Economic Policy Institute (EPI) headlined a commentary as “Growth in Social Security wealth outpaces all other sources.” In their book, EPI scholars Edward Wolff and Christian Weller — on page 1 no less — write that “Social Security benefits can be converted into the amount that would need to be saved by individuals to replace the program’s benefits. For instance, for the typical worker, actuaries estimate that the disability benefit is worth $353,000, and the survivors’ benefit is worth $403,000.” Further, they contend, “For the typical person approaching retirement, the value of expected future Social Security retirement benefits represents the largest single source of wealth.” In addition, these scholars say, “Social Security provided a larger addition to wealth than any other form of wealth between 1989 and 2001 for the average person near retirement.”


The same logic applies to Medicare as wealth. At 65, recipients get health insurance benefits at far less than their market value. In economics language, the “present value of this flow of benefits” comes to about $350,000 for a couple. Of course, the federal government doesn’t let people choose whether to take the money value of future Medicare benefits or the lifetime of subsidized insurance, so cumulative insurance benefits might be worth less that the coverage is today. That said, it could cost much more to buy insurance on the open market and guaranteed lifetime access is worth a great deal.

Some NewsHour viewers say that because Social Security and Medicare are mainly for older Americans, these programs aren’t worth anything to people in their 40s and 50s. If you die young, your dependents can claim survivor benefits since Social Security provides a type of life insurance policy. Otherwise, by paying taxes, the middle aged are accumulating the right to future benefits. At age 55, when most such taxes have already been paid in, they can use more of their current income knowing that they’ll be covered later.


Another question that viewers raised is whether wealth inequality is reduced by these government programs when the wealthy get them too. To that I say that raising wealth at the bottom and the top by an equal amount reduces relative inequality (since any given amount is a higher percentage of lower-earners’ wealth). Also, for Medicare wealthier people pay a higher premium while, for Social Security, they pay a higher tax rate on this and income more generally.

The basis for my contention that the bottom 20 percent and each subsequent 20 percent of earners each consume about 20 percent of health resources comes from a convincing article by Gary Burtless and Pavel Svaton in the academic journal, Forum for Health Economics & Policy, Vol. 13 (2010).


Finally, two other points I didn’t have time to make fully in the NewsHour segment might assuage some who think my views are biased or parochial. First, people accumulate wealth throughout their lives, and when economists divide us into upper and lower segments, they are including lots of young people whose wealth is likely to rise, thanks to their future earning power. If we look at just one age group at a time, we get a different and less unequal picture of wealth inequality.

Second, the wealth distribution in our country is about the same as it is in Sweden and Germany — countries more identified with a strong social safety net than wealth inequality. One new report shows that the top fifth of Swedish households own 73 percent of the wealth while the bottom three fifths own only about 6.5 percent — and that’s not counting money held offshore, the value of family-owned firms, and super-rich Swedes who left the country. Similarly, economists Joachim R. Fricki and Markus M. Grabkaii report that in Germany the top fifth own about 80 percent of German financial, business, and housing wealth — unless , that is, public pensions are included. The pension entitlements bring the top fifth’s wealth share down to 60 percent, a reduction not too different from the decline I estimate for the U.S.

Finally, by pointing out that Social Security and Medicare lower wealth inequality, I’m recognizing the importance of programs that lower overall wealth gaps. Readers shouldn’t get me wrong on that!