Inside the Issues

From Welfare Reform to Taxes, Richard Caputo Explains Hot Button Issues of 2012 Election

With the debates over and the presidential election around the corner, YU News sat down with Dr. Richard Caputo, professor of social policy and research and the director of the PhD program in social welfare at the Wurzweiler School of Social Work, to sort through all the campaign rhetoric. Breaking down each candidate’s stance on issues ranging from Social Security and Medicare reform to income inequality and tax cuts, Caputo provides an in-depth look at some of the issues that will weigh on the minds of voters on November 6.

Q: Why are Social Security and Medicare such critical debate topics in this year’s election?

A: Your question involves two related programs. One is Social Security, which is disability and old age insurance, and the other is Medicare, which is the medical provision. Both of those programs primarily target those retirees aged 65 and over and their dependents.

Dr. Richard Caputo is professor of social policy and research director of the PhD program in social welfare at Wurzweiler.

A lot of the debate is about what’s going to happen over the next 30 to 40 years when the baby boomers (those born between 1946 and 1964) retire. The way Social Security is set up, it’s a pay-as-you-go system, which means the current generation is paying into the benefits that the current generation of retirees gets. Basically, over your working life, you’re contributing to the benefits of your parents and grandparents. That creates a problem when there’s a bulge in the prospective age of people retiring. The money that is paid out to them will exceed the amount of money coming into the system.

For Social Security, that’s not too bad, because the amount of sums being given out as well as those being contributed can be controlled. The larger uncertainty is Medicare, because health costs are much more difficult to control and we don’t know whether the current generation of retirees will be healthy or unhealthy and how much cost we can really incur. That’s less predictable. Healthcare costs have escalated much more greatly than the average cost of living, and if that trend were to continue, we don’t have enough money to cover the anticipated costs.

We pay for Social Security with a dedicated payroll tax that goes into a trust fund. You pay six to seven percent of your salary into the fund and it’s matched by your employer. But it’s capped on earned income up to about $110,000. You pay payroll tax on every dollar you make up to that. After that point, your money is yours, unlike with income tax. Because of that cap, people who are more affluent are not subject to it, so in essence they stop contributing to the Social Security Trust Fund. In our anti-tax climate, the prospect of raising that cap is a non-starter. For the most part, no one wants to do that. You’d be taxing the wealthy. So politically you have to calculate the political cost of raising the tax on the affluent because they’re the only ones you can go after to pay more. That’s the dilemma.

President Obama wants to keep Social Security the way it is. My sense on this is that Governor Romney, and the Republican Party in general, want to see some portion of the Social Security payroll tax privatized. What proportion? It depends. The previous administration started talking about taking two percent of the money and privatizing it. Instead of paying six or seven percent of your income into the Social Security trust fund, you’ll pay five percent and then take two percent and have investment options in the private sector. If you’re risky, you can put it in a private investment. If it works out, you do well. However, if the stock market crashes and you lose money, you can still rely on that minimum five percent that everyone contributes to Social Security, but you may end up with slightly less money than you had planned to have.

Photo by: Scout Tufankjian for Obama for America

Now people hear this and say, ‘Oh, that’s erosion of Social Security, that’s the first step in disaggregating it totally.’ Whether that would eventually come to be – who knows? But that’s why that plan hasn’t been adopted. The Bush administration tried to get the legislation through and it just didn’t work. But Congress wasn’t all Republican at that time, and Democrats don’t like that idea at all. Democrats don’t see any major change to the current system. They’ll tinker. There are a lot of ways you can tinker. You can freeze some benefit levels. You can ask people to retire later. Right now there’s automatic inflation adjustment. They can lower that a bit; make it every two years instead of every one year. The government could borrow money. They could change the income tax rates slightly. Thirty-six percent is our upper limit now, but at one time we were at 50, 60, even 95 percent. Of course, these days people get very upset if you increase anything.

Medicare is different. The Romney plan is to use the Temporary Assistance for Needy Families (TANF) program, the former Aid to Families with Dependent Children program (AFDC), as a model. In 1996, AFDC, the open-ended federal-state program that had provided cash assistance primarily to low-income women with young children who were deemed eligible, was turned into TANF which caps federal dollars going into the program, places time limits on the length of time welfare recipients can receive cash benefits and gave states greater discretion about how to allocate the money . The federal government gives the states a lump sum of money and they say, ‘Here’s what you use for your welfare population. No more than this from us. If you want to use some of your own state money, that’s fine.’ In other words, if we give you $100,000,000, that’s it. You’re not going to get another cent from the federal government.

In 1996, more control was given to the states over how they spent the money (for job training, child care, etc.) and that’s what Romney and Ryan would like to do to Medicare—de-federalize it, turn it over to the states. Give them a lump sum and let them figure out what they want to do with that money to make sure retired, elderly and disabled individuals have access to healthcare. Let the states figure it out like they do with TANF. Cap the amount of money that the federal government will distribute.

Obama believes that’s not the way to go because states vary. They vary by affluence, they vary by administrative and technical capacity, and they vary by the quality of medical care. The rationale behind Medicare is centralized administration, better oversight and lower administrative costs. And most people are happy with that. The fear of turning Medicare over to the states is because there’s such variation across the states.

How do the candidates address declining economic mobility and increasing income inequality?

Both parties want to see increasing mobility, because it’s a real problem. The financial crisis exacerbated the degree of disparity between the very affluent and the less-wealthy. The degree we are currently at is unprecedented in terms of how so few control so much of the wealth of the country. That becomes problematic, and that’s Occupy Wall Street. We’re rewarding a very small percentage of the population, and we’re rewarding them so much that they’re taking a bigger piece of this whole pie that we have. And if there’s less mobility, it’s going to be the same people rewarding themselves all the time and we simply can’t have that. The middle class is shrinking in essence. The bottom is getting larger and the top is very small but much more politically influential.

My sense is that the Democrats have always favored more public provision of things, getting money into the economy via lower-income people who are likely to spend it on consumption goods– they’re meeting basic needs. They want people to be working, and if that means subsidized jobs, FDR is the model. We underwrite the labor market to some degree and get people working so they can feed themselves, shelter themselves and get their kids to school because they don’t have enough money to invest.

The Republican Party’s a little different. They see themselves as the champions of small business, and in that way they probably are better for small businesses than the Democrats. But the Republicans are also interested in the more affluent because they see the small business person and the more affluent alike as moving money into business-related investments, and it’s investing money that’s important. Their argument is if you want the economy to grow, you need to move money into businesses and investments.

Democrats are more consumption-based: “How do we get money to people so they can spend it almost immediately?” Republicans say, “Let’s get finance in order so people can invest.” And it’s likely to be the more affluent people who can invest because their basic needs are already met. The theory is they invest and that creates jobs.

I think there’s a combination that’s better. In some sense I am a Keynesian in that I think consumption is important. I’m all for government underwriting jobs—they don’t have to be permanent, but just to get cash into the economy. On the other hand, I’m enough of a realist to know that finances do matter. If you’re the mayor of a city, a lot of your income is from higher-income folks, so you need them around. You have to figure out where the balance is. I wouldn’t cater to the financial industry as much as we have.

We always hear each party argue about the right way to fix the economy, whether it’s raising taxes to create more revenue or cutting taxes to create more jobs? Which option works better?

It depends on when you’re looking and the types of taxes. We’ve had times where we cut income and corporate taxes and that stimulated the economy. Kennedy did it. So of course Reagan said, ‘Kennedy did it, so can I,’ and Romney says, ‘Both Kennedy and Reagan did it, we can do it.’ But conversely, if you look at Clinton, he raised taxes and the economy boomed. FDR did both, spending money and getting us into more debt to help us get out of the Depression and raising taxes in 1937 to help balance the budget, but with a recession afterwards. In that case, spending more seemed to work for a while, but net results were mixed and still subject to debate.

In the 50s and 60s, our highest marginal income tax rates ranged from 91 to 77 percent, and we were booming. The highest marginal rate was 70 percent in the 1970s as the economy sort of went out of kilter: high inflation and high unemployment. But there seemed to be no rhyme or reason to that. The relationship between taxes, inflation and unemployment was questionable. Bottom line? I think the economy is basically a crapshoot. Taxes, the economy and political affiliations of presidential administrations are not necessarily or causally related in any long-term trends.