January 26, 2023

Middle Class Gets the Most from Medicare

This is a fact of retirement life: older Americans haven’t paid as much into Medicare and Medicaid as government spends on their healthcare and nursing home stays.

But it is middle-class retirees who get the most out of the system, according to a new study.

Middle-income households receive about $230,000 to $260,000 more in Medicare and Medicaid benefits, on average, during their retirement years than the total amount they’ve paid in. Their contributions consist of the Medicare payroll and income taxes deducted from workers’ paychecks, the portion of their federal and state income taxes devoted to Medicare and Medicaid, and the Medicare Part B and D premiums they are paying in retirement.

The net benefit of the programs to the middle class dwarfs the $153,000 in average net benefits for retired households in the top fifth of the lifetime earnings distribution, and it also exceeds the $196,000 gain for the bottom fifth.

The middle class is defined as the second, third, and fourth of the five earnings groups the researchers analyzed in this study. The annual data used to calculate the health spending and payment estimates for this analysis are adjusted for inflation.

Americans over 65 receive a third of all the medical care provided in this country. This new research, funded by the U.S. Social Security Administration, uses government administrative data to compare the benefits of Medicare and its smaller companion program, Medicaid, for each earnings group.

There are two reasons the middle class gets the most from the system. First, although the top earners live the longest and receive the most medical care, the middle class lives almost as long and ends up receiving a significant amount of care. …Learn More

November 16, 2021

Lifting SALT Deduction Would Help the Rich

Manhattan residents who itemize their federal tax returns pay an average $102,000 in state and local taxes – more than anywhere else. The second highest tax tabs, nearly $50,000, are in Marin County, the home of musicians and movie stars across the Golden Gate Bridge from San Francisco.

Other enclaves with large bills for property, sales, and income taxes include Falls Church, Virginia, a high-income community outside Washington, D.C., and Teton County, Wyoming, where the super-wealthy buy property on the open range surrounding Yellowstone and Grand Teton National Park.

In 2017, Congress put a $10,000 cap on the amount of state and local taxes – or SALT – that all homeowners could deduct on their federal income tax filings. The proposed reconciliation bill being hashed out in Congress might increase or remove that cap.

The Brookings Institution argued that lifting the cap would “massively favor the rich” at a time U.S. inequality is already at historic levels. There is no shortage of evidence to back that up.

High-income Americans on both coasts and in major cities like Chicago and Dallas would save thousands of dollars from lifting the cap on SALT deductions. In Santa Clara County, home to Silicon Valley, for example, the average high-income taxpayer who itemized reported that they paid nearly $47,000 in state and local taxes in 2018, according to the bipartisan Tax Foundation’s analysis of IRS data.

But due to the current cap, the IRS permitted county residents to deduct only about $9,000 for their SALT taxes. (The number is slightly below the $10,000 cap because some itemizers take smaller deductions if, for example, they are renters and don’t pay property taxes.)

One proposal gaining currency in the House would increase the cap on deductions from $10,000 to $80,000, as an alternative to eliminating it entirely. Garrett Watson, author of the Tax Foundation report, said that either raising the cap or another idea – limiting the cap to the nation’s top earners – would still mainly benefit the top 5 percent.

But, he added, preserving some type of cap, even if it’s more generous, “will be less regressive than eliminating it altogether, because the folks at the very top – the multimillionaires and billionaires – would still face that curtailed SALT deduction.”

The Tax Policy Center, an affiliate of the Urban Institute and Brookings, estimates that repealing the cap on SALT deductions would increase after-tax income for households earning more than $100,000 by between 1 percent and 2 percent. Families with lower earnings would be unaffected. …Learn More

February 11, 2021

Billionaires Got Much Richer in Pandemic

In the COVID-19 downturn, this blog has had a steady supply of stories and statistics about the damage being done to low-income and middle-class families.

That’s one perspective on the pandemic. The growing billionaire class is another one.

Since last March, the nation’s 660 billionaires have added more than $1 trillion to their wealth – a 39 percent increase. Their combined net worth is now $4 trillion, which is nearly double the $2 trillion held by the 165 million Americans in the bottom half, according to the Institute for Policy Studies’ new report.

“It’s a troubling sign that too much of society’s wealth and income is flowing upwards to that small group of people,” Chuck Collins of the Institute for Policy Studies said during an interview on NPR’s Fresh Air.

The institute’s report is based on Forbes magazine’s annual estimates of the net worth of the world’s richest people.

Inequality has always been with us, but economists say it has grown as billionaires’ wealth has hit stratospheric levels.

To be sure, inequality would’ve been worse without the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The $500 billion in direct assistance to families last spring prevented a surge in poverty, and the relief bill passed in late December is sending more aid to unemployed and under-employed people who need it.

The billionaires are getting richer for a couple reasons, starting with a surprisingly strong stock market in 2020. Despite the worst public health crisis in a century and a struggling economy, the Standard & Poor’s 500 stock index shot up 18 percent.

But some billionaires were also in the right place at the right time – a pandemic. …Learn More

April 23, 2020

COVID-19 Could Increase US Inequality

A growing number of Americans can’t pay their rent, and the queues forming outside food banks hint at human need on the scale of the Depression. For Americans who were already living paycheck to paycheck prior to the pandemic, the $1,200 relief checks the government has deposited into their bank accounts are too little and came too late.

Few are being spared the financial fallout from the COVID-19 economic contraction. But economists predict the damage being done to working and middle class people will cause another surge in U.S. inequality, just as the previous recession did.

The big unknown is whether this downturn, which is unfolding more violently than the previous one, will do even more damage to livelihoods and produce an even bigger increase in inequality. Some economists say the unemployment rate is approaching 20 percent – double the peak reached in 2009.

New York University’s Edward N. Wolff, who has studied inequality for decades, predicts wealth inequality will spike again within the next two years. In the last recession, wealthy people lost money in the stock market, but the middle class did much worse.

The typical U.S. household’s net worth – their assets minus their debts – plunged by 44 percent between 2007 and 2010. This ended a 15-year period of stability relative to wealthier households, pushing inequality to historic highs.

The vulnerability in middle America’s finances back then remains a vulnerability today: debt. The Federal Reserve Bank of New York was already reporting early signs of growing financial distress among credit card borrowers prior to the current contraction, and Wolff said that the ratio of debt to net worth in the middle class is currently higher than it is for other groups. This debt, when combined with a fall in investment portfolios and an expected decline in house prices, will push up wealth inequality, he said.

Another form of inequality – the disparity in incomes – widened after the last recession and Boston College economist Geoffrey Sanzenbacher worries that it will increase again. Between 2008 and 2018, the top 1 percent of U.S. families received nearly half of the increase in incomes for all U.S. families, adjusted for inflation. …Learn More

November 1, 2018

US Inequality is Feeding on Itself

The fact that the richest Americans are grabbing such a big slice of the pie isn’t exactly breaking news.

What is news is that Wall Street is getting nervous about it. Moody’s Investors Service, a private watchdog for the federal government’s fiscal soundness, has concluded that inequality has reached the point that it threatens a system already being strained by increases in the federal debt. But Moody’s also noted that inequality is contributing to slower economic growth, which further aggravates inequality.

The high level of U.S. inequality today “sets us apart” from Canada, Australia, and several European countries, Moody’s said in an October report, “Widening Income Inequality Will Weigh on U.S. Credit Profile.”

Moody’s central concern is how inequality will affect the federal budget. When the economy slows in periods of high inequality, there are more lower-income households requiring support from costly programs like Medicaid.  Federal tax revenues also decline during any downturn, leaving less money to pay for these means-tested programs and for social insurance programs like Social Security and Medicare.

The firm’s second concern is that inequality is a drag on the economy. When the middle-class is squeezed, for example, they have less money to buy consumer goods. And when the economy slows down, inequality can increase, as it did in the years after the 2008-2009 recession.

This has played out in a widening wealth gap, Moody’s said.  The typical lower and middle-income worker’s net worth – assets minus liabilities – has shrunk since the recession, while net worth rose sharply for the people at the top.

One big reason for widening inequality is the stock market. Even though the market declined sharply this month, the post-recession bull market has beefed up investment portfolios – but only for the 50 percent of Americans who own company shares or stock mutual funds.

A second contribution to a widening wealth gap, post-recession, has been housing. A home is often the most valuable asset people own, so the steep drop in house prices and the spike in foreclosures were big setbacks for people who aspired to build wealth through homeownership. …Learn More