America’s Social-Welfare System Dwarfs Europe’s

By Robert Rector

Tuesday, September 15, 2015

Tomorrow, the U.S. Census Bureau will release its annual poverty report. Conventional wisdom holds that the U.S. has a small social-welfare system and far more poverty, compared with other affluent nations. But noted liberal scholars Irwin Garfinkel, Lee Rainwater, and Timothy Smeeding challenge such simplistic ideas in their book Wealth and Welfare States: Is America a Laggard or Leader?

Garfinkel and his colleagues examine social-welfare spending and poverty in rich nations. They define social welfare as having five components: health-care spending; education spending; cash retirement benefits; other government cash transfers such as unemployment insurance and the earned-income tax credit (EITC); and non-cash aid such as food stamps and public housing.

The authors find that in the U.S., social-welfare spending differs from that in other affluent countries because it draws heavily on both public and private resources. By contrast, in Europe, government controls most of the resources and benefits. For example, in the U.S., government health-care spending is targeted to elderly and low-income persons; the American middle and working classes rely primarily on employer-provided health insurance. The U.S. government health-care system is, therefore, more redistributive than the systems of most other developed nations.

Elderly middle-class Americans are also more likely to have private pensions than are Europeans. Middle-class parents in the U.S. pay for much of the cost of their children’s post-secondary education; in Europe, the government pays. Overall, in Europe, the upper middle class is heavily dependent on government benefits; in the U.S., it relies much more on its own resources.

But even setting aside the private sector, the U.S. still has a very large social-welfare system. In fact, among affluent nations, the U.S. has the third-highest level of per capita government social-welfare spending. This is striking given that government spending in the U.S.  is more tightly targeted to benefit the poor and elderly.

When private-sector contributions to retirement, health care, and education are added to the count, social-welfare spending in the U.S. dwarfs that of other nations. In fact, social-welfare spending per capita in the U.S. rises to nearly twice the European average. As Garfinkel et al., conclude:

    For those who believe the absolute size of the US welfare state is small, the data presented . . . [in the book] are shocking and constitute a wake up call. Once health and education benefits are counted, real per capita social welfare in the United States is larger than in almost all other countries!

Only one nation (Norway) spends more per person than the U.S. spends.

How much of this spending reaches the poor? The Left often claims that the U.S has a far higher poverty rate than other developed nations have. These claims are based on a “relative poverty” standard, in which being “poor” is defined as having an income below 50 percent of the national median. Since the median income in the United States is substantially higher than the median income in most European countries, these comparisons establish a higher hurdle for escaping from “poverty” in the U.S. than is found elsewhere.

Measuring the poverty-fighting success of the United States versus Europe according to this uneven standard is like having a race in which the European sprinters run 100 meters and the American runner runs 125 meters. The Europeans reach the finish line first and are declared faster. Using such non-uniform standards to compare countries is obviously misleading.

A more meaningful analysis would compare countries against a uniform standard. To their credit, Garfinkel and his co-authors do exactly that. They measure the percentage of people in each country who fall below the poverty-income threshold in the U.S. ($24,008 per year for a family of four in 2014). The authors reasonably broaden the measure of income to include “non-cash” benefits such as food stamps, the earned-income tax credit, and equivalent programs in other nations. They also subtract taxes paid by low-income families, which are heavy in Europe. (Their poverty comparison does not include health care and education.)

By this uniform measure, the U.S. was found to have a poverty rate in 2000 that was lower than the United Kingdom’s but higher than the poverty rates of most other West European nations. But the differences in poverty according to this uniform standard were very small. For example, the poverty rate in the U.S. was 8.7 percent, while the average among other affluent countries was around 7.6 percent. The rate in Germany was 7.3 percent, and in Sweden, it was 7.5 percent. Using a slightly higher uniform standard set at 125 percent of the U.S. poverty-income thresholds, the authors find that the U.S. actually has a slightly lower poverty rate than other affluent countries.

Misperceptions about the extent and severity of U.S. poverty are, in part, driven by the Census Bureau’s consistently flawed poverty report. Census defines a family as poor if its income falls below certain thresholds. But in counting income, Census ignores almost all of the trillion dollars per year that government spends on means-tested welfare aid. Census pretends that programs such as food stamps, the refundable EITC, and housing vouchers do not exist. No surprise, then, that other government reports show that poor people spend $2.30 for every $1.00 of income Census claims they have. 

The actual living standards of the poor differ greatly from conventional perceptions. The government’s own data show that the typical poor family in the U.S. has air-conditioning, a car, and cable or satellite TV. Half of the poor have computers, 43 percent have Internet, and 40 percent have a wide-screen plasma or LCD TV. The U.S. Department of Agriculture reports that only 4 percent of poor children were hungry for even a single day in the prior year because of a lack of funds for food.

Only 7 percent of poor households are over-crowded. The average poor American has more living space than the average, non-poor individual living in Sweden, France, Germany, or the United Kingdom. By his own report, the average poor person had sufficient funds to meet all essential needs and was able to obtain medical care for his family throughout the year whenever needed.

It is, of course, a good thing that left-wing claims of widespread deprivation in the U.S. are inaccurate. But government welfare policy should be about more than shoveling out a trillion dollars per year in “free” benefits. When President Lyndon Johnson launched the War on Poverty, he sought to decrease welfare dependence and increase self-sufficiency: the ability of family to support itself above poverty without the need for government handouts. By that score, the War on Poverty has been a $24 trillion flop. While self-sufficiency improved dramatically in the decades before the War on Poverty started, for the last 45 years, it has been at a standstill.

A decent welfare system would return to Johnson’s original goal of reducing poverty by increasing self-sufficiency. It would require able-bodied recipients to work or prepare for work if they are to receive benefits. It would reward, not penalize, marriage. In other words, it would be the exact opposite of the welfare behemoth we currently have.