The five biggest lies about entitlement programs

Everybody loves lists.

Most of those you see in the papers or online tend toward the inconsequential (The Six Best “Fast & Furious� Movies).

So here’s a list with a bit more gravitas: The five biggest lies you’re being told about entitlement programs.

Never mind that the very word “entitlement� is a lie. Social Security and Medicare got that name because workers became “entitled� to those benefits by paying into the system. In recent years, however, the term has become distorted to signify benefits people are entitled to without earning them.

Leaving that whopper aside, here are the top five.

Lie No. 1: The payroll tax hike is killing the retail economy.

As with all great lies, there’s a nugget of truth buried inside this one. Evidence exists that the lower paychecks most American consumers started seeing at the beginning of the year took a bite out of consumer spending. A slew of low-end retailers and merchants, including Wal-Mart, contend that the Jan. 1 change in the Social Security payroll tax, which lowered the average household income by about $80 a month, came out of their hides.

Blaming the payroll tax, however, ignores the whole story. First, on Jan. 1 the tax wasn’t hiked; it was restored to its 2010 level, after a two-year “holiday� that reduced the withholding to 4.2% of employees wages (up to wages of $101,800 in 2011 and $110,100 last year) from the 6.2% level in effect since 1990.

The idea was to deliver stimulus dollars to middle- and working-class families. But the holiday was always a wretched idea, in part because of what everyone knew would happen when the old rate reappeared —people treated it as a pay cut.

The worse flaw was that it was a lousy way to deliver targeted working-class relief. The change replaced the Obama administration’s previous Making Work Pay tax credit, which delivered up to $800 to families earning $12,900 to $150,000.

The payroll tax break, by contrast, went only to those who pay into Social Security. So it left out 5.7 million state and local workers (mostly teachers). On the plus side, it fattened the paychecks even of the nation’s top earners by a much-needed $2,100 or so.

Lie No. 2: “Entitlement� benefits for millionaires and billionaires are a costly problem.

This is a favorite of people like hedge fund billionaire Peter G. Peterson, a sworn enemy of Social Security and Medicare. The theme is: Look how wasteful Social Security is — why it even goes to people like me! The goal is to “means test� these benefits so they go only to people who “need them,� as Peterson says.

The lie here is the assertion that a significant portion of benefits goes to multimillionaires. In fact, their share of benefits is minuscule. That’s because there aren’t very many of them, and they don’t get more than the maximum old-age benefit, which was $30,156 last year. According to the IRS, only 47,732 households reported income of more than $1 million, including Social Security benefits, in 2010. Their total take was about $1 billion, after paying income tax on their Social Security checks. They account for about 14 hundredths of one percent of all Social Security outlays.

By contrast, more than 75% of benefits go to recipients with $20,000 or less in non-Social Security income and more than 90% to people with incomes below $50,000, as economists Dean Baker and Hye Jin Rho of the Center for Economic and Policy Research showed in March 2011.

To reduce program costs by even a couple of percentage points, you have to start cutting benefits for people earning as little as $40,000 in non-Social Security income. So when Pete Peterson starts bemoaning how his Social Security check is cutting into his granddaughter’s future, it’s the working class that should bolt the door.

Lie No. 3: Social Security and Medicare are $60 trillion in the hole.

As efforts to cut Social Security and Medicare gather steam in the budget wrangling in Washington, you’ll hear these mega-trillions being thrown around more and more. Beware. They’re numbers designed to terrify, not edify.

The assertion comes from something called the “infinite horizon� projection. It’s a calculation of funding gaps projected out to the limitless future and then converted to present value — meaning what the cost would be if we had to pay it all today. For Social Security, the figure was $20.5 trillion, as reported in the program trustees’ latest report. For Medicare, the number comes to about $42.7 trillion.

Even professional actuaries say this calculation is bogus. In 2003, when it was first inserted into Social Security’s annual report, the American Academy of Actuaries warned the trustees that the infinite projection provides “little if any useful information� and is “likely to mislead anyone lacking technical expertise ... into believing that the program is in far worse financial condition than is actually indicated.�

A big part of the lie is that these projections aren’t applied to the other side of the ledger — the programs’ revenues and growth in the U.S. economy projected out to infinity. The latter, the trustees calculate, would be about $1.5 quadrillion. (How’s that for a big number?) For Social Security, the infinite gap accounts for only 1.3% of infinite GDP, which would bring it about to the level we spend today on defense and veterans affairs.

Lie No. 4: You’re paying too much (or too little) for your benefits.

This is a double-barreled lie, based on the misconception that Social Security and Medicare are retirement funds. They’re not; they’re insurance programs. What you recover depends on your personal circumstances, but the point is they’re there when you need them.

The idea that the social insurance programs will impoverish today’s children while their grandparents make out like bandits was recently rehashed in a Wall Street Journal op-ed by former hedge fund manager Stanley Druckenmiller and two colleagues. “A typical third-grader will get back (in present value terms) only 75 cents for every dollar he contributes to Social Security over his lifetime,� they wrote. “Meanwhile, many seniors with greater means nearing retirement age will pocket a handsome profit.�

That isn’t true, according to C. Eugene Steuerle and Stephanie Rennane of the Urban Institute, whose 2011 calculations are the basis for most such assertions. They computed that a couple retiring in 2010 with annual earnings of $113,000 would have paid about $750,000 in 2011 dollars into Social Security over their working lives, and collect (on average) $665,000 in lifetime benefits. (The tax computation includes both the employee’s and employer’s share, and is adjusted for inflation and a small investment gain; the benefit calculation is also discounted for future inflation.)

Not exactly a “handsome profit,� but that’s how insurance works. Some people will die two years into retirement, others will live to 100. Some families will be sustained by Social Security, some will collect disability pay, some will receive dependent benefits, some won’t need any of those payments. But no other public or commercial insurer provides all those potential benefits at Social Security’s low cost.

What skews the calculations is Medicare, which leads us to:

Lie No. 5: Medicare, Social Security — it’s all the same.

Not at all. Medicare is in big trouble, almost exclusively because of rising healthcare costs. Social Security can be financially tweaked by changing its tax or benefit structure, or both. That won’t work with Medicare, which is the prisoner of this big external factor. Steuerle’s and Rennane’s calculations show how these costs outstrip individual contributions — our high-income couple retiring in 2010 will have paid $149,000 in taxes, yet receive $351,000 in lifetime benefits. The imbalance increases for future retirees.

The lesson is that it’s misleading to lump these two programs together as if they have the same issues amenable to the same solutions. But that’s what you usually hear: “Social Security is mostly OK, Medicare is in big trouble, so entitlement programs are in big trouble and we should cut Social Security.� See how much trouble a lie can make?

Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at [email protected], read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.