Random Fact

India was the 20th largest exporter in the world this past year. It was the 12th largest importer in the world (CIA World Fact Book).

Section 4: Government Anti-Poverty Programs PDF Print E-mail
Microeconomics - Unit 9

Social Security 

 

The Social Security Program is mostly a retirement program, but it has welfare elements, as well. In addition to providing retirement income for many citizens, it pays for widows, orphans, and disabled persons. A little over 12% (including the employer's contribution) of every $100 earned is paid to the government for the Social Security trust fund. A person is eligible for Social Security income in her/his early 60s. Benefits depend on how many years one has worked, the amount of the total contribution, and the age at which a person retires. (Retiring earlier will decrease yearly benefits, and retiring later will increase yearly benefits.)

Many people feel that the system provides a false sense of security. Workers are led to believe that they will be secure in their retirement days because there is social "security." Because past administration have used surplus Social Security funds to help pay for the deficit, and with many Baby Boomers ready to retire in a few years, Social Security may only serve to provide minimal benefits to those reaching the "golden years."


Currently, the program still enjoys a surplus in its trust fund. However, in several decades, as most Baby Boomers will be enjoying full retirement, the surplus will run dry, and Social Security will experience a deficit.

So far, the Social Security program has helped many elderly avoid poverty. The real question is: at what cost? Is there an alternative that is more effective? Can we improve the system?

Privatizing Social Security 

Some politicians and economists favor phasing in a privatized retirement program. This allows people to choose their retirement options, and provides potentially higher long-term returns. A privatized system will have to be phased in slowly in order to not financially harm people who currently or soon will receive Social Security income. Most likely, a privatized system will still require people to contribute a certain percentage of their income. However, each individual will have a choice in how to invest these savings. Most likely, the rate of return will be higher than the rate that the government has paid to Social Security recipients. People will need to be better educated though (perhaps through mandatory programs in middle and high schools, or public service announcements in the media) in order to avoid common investing pitfalls.

Medicare, Medicaid, and Unemployment Insurance

The following five programs are important anti-poverty programs in the United States:

1. Medicare.
Medicare is medical assistance for people over age 65.

2. Medicaid.
Medicaid is medical assistance for families and individuals who are poor.

Medicare and Medicaid have benefited many poor and elderly people by assisting them with their health costs. The programs also have cost taxpayers hundreds of billions of dollars during the past decades. The inefficiency with which these programs are run, as well as the increasing fraud, provide reasons to scale back or eliminate these programs. Supporters of this idea suggest that once the programs are scaled back or eliminated, the federal government will be able to lower taxes. This will allow individuals to help pay for private insurance.

3. Unemployment insurance.
Unemployment insurance includes benefits to people who have lost their jobs. Employers bear the brunt of the tax for this fund. Benefits vary per state and individual (depending upon previous salary). The average compensation is approximately $275 per week. Unemployment Insurance income is taxable. The average duration of benefits is 26 weeks, but Congress frequently passes bills (especially during recessions) allowing extension of benefits. For more information about the Unemployment Insurance program, please click HERE.

4. Food Stamps.
The food stamp program provides coupons or electronic payments (debit cards) to needy families. This allows them to purchase grocery store items. The program costs the federal government roughly $17.5 billion per year.

5. TANF.
TANF (Temporary Assistance to Needy Families) is what people most often refer to when they discuss welfare. It provides cash payments to families with children, especially those in which one parent (usually the father) has left the house.

As is true for other government welfare programs, economists accuse TANF of being poorly managed. The program may actually add to our country's poverty because of the disincentives it creates for people to work.

Other Government Anti-Poverty Programs

Housing Subsidies
Households below a certain income are eligible for government assistance, which helps pay for their housing expenses. The U.S. Department of Housing and Urban Development (HUD) operates three major federally-funded programs that provide housing assistance to low-income families: public housing, Section 8 certificates and vouchers, and Section 8 project-based programs. Some states also run small programs providing housing assistance. For an article about housing subsidies, click HERE.

Head Start
Low-income households receive assistance for children between the ages of 0 - 5 in the areas of education and early childhood development, medical, dental, mental health, and nutrition. For more information about Head Start, click HERE.

 

Earned Income Tax Credit
The Earned Income Tax Credit (EITC) provides a tax refund or subsidy to eligible individuals and families who work and have earned income under a certain amount.

Job Training Programs
A variety of job training programs exist. For examples of articles about job training programs, click HERE.

Alternative Courses of Action to Fight Poverty

In order to avoid the main disadvantage of current government welfare programs (that people are better off financially on welfare compared to having a job), economists have suggested the following alternative courses of action.

Privatizing Welfare

 

Some economists suggest that we may be able to help the truly needy more efficiently through private efforts, such as aid from churches, local charities, neighborhood task forces, friends, and families. If a family is truly in need, these groups will be in a better position to know and will provide help. Many private charities already work effectively to reduce poverty.

If government welfare programs are eliminated, it will free up hundreds of billions of dollars in taxes. This will raise after-tax incomes and will allow income-earning households to better afford to help. They will also feel more responsible to help, instead of relying on the government. Government welfare programs are generally bureaucratic. Government workers typically cannot distinguish whether an individual is truly in need, or whether a person is abusing the system. The welfare programs have also become an industry in itself. Government welfare workers may have a conflict of interest in that they have a vested interest in keeping individuals on welfare in order to preserve their own jobs. Private charity programs, such as local soup kitchens, church initiatives, and Habitat for Humanity, may not be the solution to all poverty problems in a country, but the question we have to ask ourselves is: will it improve the situation compared to the current one?

The Negative Income Tax Program 

Some economists, most notably the late Milton Friedman, have suggested a negative income tax program.

The negative income tax program proposes to establish an income level (for instance $18,000) above which an individual will pay taxes, but below which an individual would receive a government subsidy (a subsidy is a negative tax).

Below is a table with examples of subsidies at various income levels. The table assumes that the government pays income earners 50% of the difference between their income and $18,000.

Job Earnings Government Subsidy Total Income
$0 $9,000 $9,000
$4,000 $7,000 $11,000
$10,000 $4,000 $14,000
$18,000 $0 $18,000

Advantages of this program are that this system is much simpler and easier to administrate, and that workers always take in more money as their work effort increases. This is in contrast to the current welfare system, in which many welfare people find themselves worse off if they were to start a job. A disadvantage of the negative income program remains that it is a government-administered program, and it enables people to receive financial help without having to work for it. But is it a better alternative to what we currently have?

Last Updated on Monday, 31 December 2012 10:51