America's Misguided Approach to Social Welfare

Debates about the proper role and size of government dominated the 2012 U.S. presidential election. President Barack Obama; his Republican rival, Mitt Romney; and their surrogates relentlessly sparred over who should pay what taxes, who should get what benefits, and how Washington should manage major sectors of life, such as health care and education. What neither side made clear was how the United States stacks up against other developed countries. As other countries embraced big government and generous social policies in the middle of the twentieth century, the common wisdom goes, the United States sought a relatively small welfare state. And for partisans on both sides of the aisle, one of the key issues up for grabs on November 6 was whether such American exceptionalism would persist or fade away.

A closer look at U.S. social spending shows that it is indeed distinctive, but not in the ways that many believe. The United States does tax less and spend less on social programs than most of the rich democracies with which it is usually compared. But even so, the country has developed a large and complex system of social protection, one that involves a mix of government spending, tax-based subsidies, and private social spending. In its own way, the U.S. welfare system delivers many of the same benefits as the systems in other developed countries, including health insurance, pensions, housing support, and child care. And when added together, the amount of resources the public and private sectors commit to all these forms of welfare is massive: as a percentage of GDP, for example, spending on the health and welfare of citizens is greater in the United States than in most advanced industrial economies.

Yet the American way of distributing welfare is lopsided and incomplete. Even after the Obama administration's Affordable Care Act is fully implemented in 2014, for example, the share of the population without health insurance in the United States will remain higher than in any other advanced industrial country -- even as the American public spends more on health care than publics anywhere else in the world. And the United States does not guarantee the basic rights of paid parental and sick leave -- rights assured to most other workers across the industrial world. In essence, Washington's reliance on private social benefits and services -- often provided by businesses to their employees rather than by the government to everybody -- ensures good coverage for some but poor coverage for others. Those with well-paying jobs usually get the best benefits, and those with low-paying or no jobs get worse ones. As a result, the United States' system of social protection does less to reduce poverty and inequality than that of virtually any other rich democracy.

Despite what some think, patching the U.S. social safety net need not mean setting the country on a path to socialism. The United States is on the far end of the spectrum when it comes to private social provision and tax-based benefits, but many other countries rely on a diverse mix of public and private welfare and tax subsidies, often leading to more equality and efficiency. The difference is that their systems consciously strive for those goals and are deliberately designed to ensure broad public access to benefits. It is time for Washington to take those models seriously in figuring out how to fix its own.

WHO BENEFITS?

By one common measure of social policy -- direct public spending on social programs as a percentage of GDP -- the United States ranks near the bottom of the list of rich democracies. Only a few such countries, including Mexico, South Korea, and Turkey, spend less. But that measure is somewhat misleading and does not fully capture the resources the United States devotes to social welfare. More comprehensive calculations, such as the one for "net social expenditure" developed by the Organization for Economic Cooperation and Development (OECD), which includes taxes, pensions, health care and insurance, parental leave, unemployment benefits, child care, and related expenses, paint a different picture. According to the OECD figure, the United States has the fifth-highest social spending in the world, just after Sweden.

Net social expenditure provides a better account of countries' welfare efforts because it adds together direct public spending, tax-based spending, and private spending and takes into consideration the taxes people pay. Countries not only deliver benefits to their populations but tax them as well, effectively reducing the real value of benefits. Netting out taxes can make some countries' welfare states appear significantly less lavish than they might initially. As Andrea Louise Campbell recently wrote in these pages, the United States taxes its population less than most advanced industrial countries -- so when people in the United States do get benefits, they get to keep most of them.

The United States ranks first in one particular component of the OECD's measure of net social expenditure, "tax breaks for social purposes." It is important to consider these in any picture of the American welfare state, because, as the political scientist Christopher Howard has shown, subsidies often do the same work as direct spending programs. From the Child and Dependent Care Credit, a tax reimbursement for child care, to the tax exemption for employer contributions to health insurance, to tax deductions for home mortgages, the federal government often uses this method to subsidize the well-being of its citizenry.

The United States is not the only country to use exclusions, exemptions, and other tax reductions to achieve social goals. In France, for instance, the income tax that households pay depends on the number of children in them, costing the French state around $18 billion in 2009, according to the Conseil des Prelevements Obligatoires, an advisory council on taxation. In the Netherlands, parents receive a tax subsidy to help cover the cost of child care. About half of the OECD countries allow taxpayers to deduct the interest they pay on home mortgages. Many allow tax breaks for private pensions, and in Australia, Canada, Ireland, and the Netherlands, those breaks are higher than they are in the United States.

Net social expenditure also includes private spending, whether mandated by the government (such as requirements that employers pay for sick leave) or voluntary (such as employer-provided pensions in the United States). As the scholars Jacob Hacker and Jennifer Klein have shown, the United States' reliance on voluntary private welfare is unique. Most adults in the United States receive benefits through their workplaces that include health insurance, pensions, dependent-care tax exclusions, and the like. This kind of private spending makes up nearly 40 percent of all U.S. social spending, compared with under 20 percent in the United Kingdom and about eight percent in France and Sweden.

Some think employer-provided benefits should not be included in measures of a country's social policy effort, because they do not involve the government's relations with its citizens and are thus not truly part of the public sphere. But if one wants to understand the total resources that societies devote to social welfare purposes and how those resources are allocated, one has to take such spending into consideration. And from the standpoint of households, ignoring private social benefits and tax breaks means leaving out a major source of their income security and well-being.

THE WELFARE QUEEN

One of the biggest canards about the American welfare state is that its primary function is to take from the rich and give to the poor. In reality, the vast majority of Americans benefit from some kind of government social program -- about 96 percent, according to the political scientist Suzanne Mettler. And while there are some countries that do focus their social policies on helping the disadvantaged, the United States is not one of them.

Scholars have long assumed that the United States' welfare system resembles that of its English-speaking cousins in the Commonwealth of Nations, which tend to have strong strains of market liberalism and thus favor private spending over public spending. Australia, Canada, and New Zealand, for example, all fall near the bottom of the scale of public spending on social welfare. But these countries, like the United Kingdom, devote a relatively high proportion of their spending to programs that are contingent on the recipients' having low incomes. In Australia, for instance, more than a third of direct public spending goes to means-tested programs, and in Canada and the United Kingdom, almost a quarter does.

In the United States, however, only about seven percent of direct public spending goes to means-tested benefit programs. To be fair, this figure understates U.S. expenditures on low-income people because it leaves out in-kind benefits -- benefits, such as health care (including Medicaid and the Children's Health Insurance Program), that are provided free or at reduced cost, as opposed to direct cash transfers. Nevertheless, according to an analysis by the Center on Budget and Policy Priorities, in 2010, 10 percent of entitlement spending in the United States went to the top ten percent of households, 58 percent of entitlement spending went to middle-income households, and 32 percent went to the bottom 20 percent.

Indirect benefits in the United States flow disproportionately to those in the middle and at the top of the income ladder. Some of the major U.S. tax breaks, such as the home mortgage interest deduction and that for charitable contributions, especially benefit those rich enough to take out a large mortgage or give large amounts of money to charity. Moreover, most tax benefits in the United States are designed as deductions -- which help only those with large liabilities -- rather than as possible sources of actual refunds, which would help lower-income citizens. (The Earned Income Tax Credit and the Child Tax Credit are notable exceptions, which is why they are so important to low-income parents.) In many other OECD countries, low-income families receive a much more generous and comprehensive array of tax subsidies and benefits, including family allowances, tax breaks for children, and subsidized child care.

Private social benefits in the United States, finally, also tend to accrue to middle- and upper-income people, since better-paying jobs usually come with more extensive benefit packages. Figures from the U.S. Bureau of Labor Statistics' National Compensation Survey reveal that the higher the average wage at a firm, the more likely that firm is to offer health coverage, retirement accounts, and life insurance. Thus, 85 percent of private firms whose average wage is in the top 25th percentile make retirement benefits available to their employees, but only 38 percent of firms whose average wage is in the bottom 25th percentile do. And the same is true for other types of benefits: 84 percent of private firms with average wages in the top 25th percentile offer paid sick leave, whereas just 29 percent of those paying wages in the bottom 25th percentile do.

Since U.S. social welfare spending is not directed primarily at the poor, it does little to reduce the country's rate of poverty or inequality. The United States ranks fourth from the bottom among OECD countries in terms of its poverty rate, just below Turkey and above Israel, Mexico, and Chile. The United States also has one of the most unequal distributions of income of the advanced industrial democracies. Although many countries have experienced rising poverty and inequality in recent decades because of economic, demographic, and technological changes, what sets the United States apart is how weakly these trends have been counteracted by tax and spending policies. Comparing poverty rates across countries before taxes are levied and benefits are paid is one way to show this. According to OECD data from the end of the last decade, whereas taxes and transfers brought down poverty rates by 20 percentage points in the United Kingdom and by 25 percentage points in France, they did so by only ten percentage points in the United States.

In sum, U.S. social welfare spending is comparatively high but only minimally redistributive. Unfortunately, Washington's track record is also mixed when it comes to assuring quality health care for all, sustaining livable incomes for senior citizens, and investing in the future productivity of the population at large.

THE MONEY PITS

The large size of total social welfare spending in the United States has a lot to do with health care. In 2010, total health-care spending amounted to 17.6 percent of U.S. GDP, almost double the OECD average of 9.5 percent. The next-highest spender, the Netherlands, laid out 12 percent of its GDP on health care. The United States' unusually high spending on health care not only harms the fiscal balances of federal and state governments but also diverts economic resources away from other goals. Government has less to spend on other social or economic objectives, and households end up devoting significant chunks of their incomes to health-care costs. As a 2011 study by the health economists David Auerbach and Arthur Kellermann in the journal Health Affairs showed, between 1999 and 2009, median-income U.S. families of four saw their gross annual incomes rise, but the gain was offset by increased spending on health care.

Most other rich nations not only spend less than the United States does on health care; they also achieve better outcomes in both coverage and quality. All the other advanced industrial nations provide universal or near-universal health insurance, while in the United States, almost 16 percent of the population (or about 48 million people, including seven million children) currently lack health insurance. The Congressional Budget Office has estimated that even after the full implementation of the Affordable Care Act, about 30 million people will remain uninsured.

Claims that all this spending at least buys Americans excellent care are dubious. The United States does lead other nations in the availability of high-tech treatments; it ranks second in per capita availability of MRI units, for example (with almost three times as many MRI machines as the OECD average) and third in per capita availability of CT scanners (with double the OECD average). But it is well below average in per capita availability of hospital beds, doctors, and doctor consultations.

Americans like to tell horror stories about waiting lists for medical procedures in other nations, and some of those stories are true, especially when it comes to elective procedures, such as hip replacements. But the United States falls short when it comes to access to basic care: according to a 2011 study by the Commonwealth Fund, a private foundation created to promote better health care, in 2008, only 43 percent of American adults could get a same- or next-day appointment to see a doctor about a medical condition, compared with 80 percent in the Netherlands, 62 percent in France, and 61 percent in the United Kingdom. Americans report experiencing medical mistakes more than people in similarly developed countries, too. Due in part to difficulties in gaining access to care, the Commonwealth report ranked the United States at the bottom of the 16 nations it studied in "preventable mortality" -- deaths that could have been prevented if timely and effective care had been provided.

Retirement pensions are the other major U.S. outlay on social welfare. In this category, the country is in the upper third of OECD nations in direct public spending. And adding in other spending on pensions and survivors' benefits, the United States ranks well above many countries known for their largess, such as Canada, Denmark, and the Netherlands. Yet even this strongest part of the American safety net comes with some caveats. Social Security has been one of the most effective antipoverty programs in history, dramatically reducing the hardship of hundreds of millions of U.S. seniors over the decades. But it still only partially replaces retirees' incomes, and the remaining need is often inadequately filled by private retirement plans. According to calculations by the Center for Retirement Research at Boston College, at the current retirement age of 66, only 55 percent of households have enough savings, investments, and expected Social Security benefits combined to maintain their previous standards of living.

If expenditures on health care and Social Security are high, spending on families is low. Despite various tax subsidies aimed at this group, the United States ranks near the bottom of OECD countries when it comes to outlays on family welfare. In a study of 173 countries, Jody Heymann, founder and director of the Project on Global Working Families, and her colleagues found that the United States is one of only four in this group of countries that do not guarantee employees paid leave for childbirth. All European countries provide between 14 and 20 weeks of paid maternity leave, usually offering between 70 and 100 percent of wages, followed by a further period of paid or unpaid parental leave. By contrast, the United States mandates only that employers with 50 or more workers allow 12 weeks of unpaid family leave. And employers have not filled the gap on their own: a 2007 National Compensation Survey from the Bureau of Labor Statistics found that only about eight percent of employees in the private sector and 15 percent of those working for state or local government had access to paid family leave.

Direct and indirect public subsidies for child care are limited, moreover, and access to public or private early childhood education varies enormously by region and income group. In 2008, the percentage of American children between the ages of three and five who were enrolled in preschool was 56 percent. The percentages in Belgium, Denmark, France, Germany, Italy, New Zealand, Norway, Sweden, and the United Kingdom were between 90 and 100 percent. In other words, although the United States devotes considerable public and private resources to social welfare, it fails to effectively meet its public's needs.

THE SOCIALISM CANARD

If American politicians ever acknowledge the shortcomings of U.S. social spending, they usually assume that the only alternative is European "socialism." In such a "government-centered society," in Romney's words, centralized state bureaucracies intrude on markets and the family; limit freedom by imposing taxes, mandates, and regulations; and force people into one-size-fits-all public services of poor quality. But such views of the social welfare policies of other nations are simplistic.

Several OECD countries have found ways to ensure widespread access to benefits and services without "socializing" the sectors in question. Australia, the Nordic countries, and most countries in southern Europe do all finance and provide health care through public agencies. However, in Canada, Japan, and much of continental Europe, although the government mostly pays for public health care, it is private actors and organizations that provide the health care itself. And in the continental European countries, private insurance either supplements a public insurance system (as in France and Germany) or is the dominant source of coverage (as in the Netherlands and Switzerland). In the Swiss system, for instance, all individuals have to buy insurance, insurers have to accept all who apply for coverage, and public subsidies ensure that coverage is affordable for all. (According to the Commonwealth Fund, about 30 percent of Swiss receive such subsidies.)

In terms of family welfare, in Germany, child care is mainly the responsibility of municipal governments, which funnel subsidies to nonprofit organizations that run daycare centers. In Australia, the Netherlands, and the United Kingdom, most child care is publicly subsidized and is provided by either nonprofit or for-profit entities. In France, publicly subsidized babysitters care for nearly one-third of children under three. Even in the Scandinavian countries, where publicly provided daycare is most common, the state offers considerable benefits to parents who care for their children at home.

The success of some public-private partnerships in Europe shows that generous, effective, and broadly accessible social welfare policies do not require large government bureaucracies staffed with armies of public servants. The government does not have to perform the work itself. But it does have to mandate its provision and monitor the agencies that perform it. Leaving social welfare up to private-sector employers without adequate public support or regulation ensures that many people will fall through the cracks. If Americans truly believe that basic social services are things that all citizens deserve, they should not be content with a social welfare system that often makes getting such services a matter of privilege or luck.

For example, rather than leaving it up to employers and individuals to take care of pension benefits, the government could mandate their provision, making them a required supplement on top of existing Social Security benefits. Washington might also consider requiring all employers to provide three months of paid family leave, with the benefits paid for by a combination of employer and employee contributions. A similar measure could mandate that employers offer paid sick days to all employees. Or the federal government could provide incentives for states to formulate such policies themselves, encouraging local experimentation while helping families across the country get what is considered an unquestioned right almost everywhere else. California and New Jersey have adopted paid family leave funded by employee contributions, and although the benefits are fairly low, all new parents -- not just those with means or generous employers -- can take paid time off from work.

Those interested in effective social policy could also look closely at the activities subsidized through the tax code. When budgets are tight and poverty is high, giving rich people thousands of dollars in tax breaks so they can buy expensive homes does not seem like a wise use of public resources. There is no reason why U.S. tax-based subsidies could not be adjusted according to income, with the deductions or credits getting phased out as citizens' incomes climb. Making more tax breaks refundable (instead of in the form of deductions), moreover, would guarantee that the benefits flowed to people who truly needed them, rather than to those higher up the income-distribution scale. Even after granting such subsidies, the government could continue to rely heavily on the private sector to deliver services, but it could do so at lower cost and to greater effect for a larger share of the population.

There is no easy political path to reforming a deeply entrenched status quo. Filling in the gaps of the American social welfare system to better help the less fortunate will involve limiting or eliminating some benefits enjoyed by others, generally those who are better off and far more politically powerful. These kinds of tough choices already loom, as the cost of health care continues to balloon and public finances are spread thin. But the lesson from peer countries is that the policy challenges themselves are not insurmountable: it is possible to provide better services to more people at a lower total cost than the United States does now, without massive government intervention, a dramatic loss of freedom, or any of the other supposed dangers lurking in the background.