People don’t feel richer because they’ve gained benefits instead of wages

Recent Gallup polls reflect a historically high 75 percent dissatisfaction with how things are going in America. Some might wonder how that jibes with continued economic growth and higher consumption across all income classes. 

Meanwhile, at least since the publication of “What’s The Matter With Kansas,” Democratic pundits have complained that the public is unappreciative of all the economic good that the party has done for them. For their part, Republican pundits suggest to voters, regardless of facts, that they become worse off whenever a Democrat is president, but achieve remarkable gains whenever a Republican is president.  

These debates and their potential disconnect from economic data arise mostly because people value different types of income differently. Much of it they don’t even see. 

I’m not referring to the frustration some feel when their income grows more slowly than others. Instead, I’m focusing on how a predominant share of income growth for many households comes from additional government transfers, not from higher wages and other market income. Also, a significant share of almost everyone’s income, whether from government or work, derives from improvements in healthcare that they don’t even count as income because it is not in their paycheck.

Of course, all income gains help finance higher levels of consumption. But eeconomists’ models, which often contain an implicit assumption that human happiness derives only from consumption, easily lead to the mistaken conclusion that people are indifferent to how they receive their income. In particular, unlike returns from work, income received from transfers adds little to individuals’ sense of dignity, accomplishment or productive worth.  

Over recent decades, Social Security and various forms of healthcare support, such as Medicare and Medicaid, have dominated the growth in government transfers. Growth in SNAP (formerly food stamps) and the earned income tax credit are significant, but an order of magnitude lower. Other means-tested transfers, in such areas as housing and traditional welfare, fall yet further behind. 

As a result, much of the real growth in transfer income extends across income classes rather than to those traditionally labeled welfare recipients. Moreover, for most income classes, net transfers (transfers less taxes) from the government have grown more than market incomes over recent decades.  

Consider the middle-income quintile of households — those whose average income is higher than the bottom 40 percent and lower than the top 40 percent of households. 

Based on Congressional Budget Office data, their average income in 1979 (in 2019 dollars) was about $49,000. In 1979, that class paid about the same amount of taxes as it received in transfers. From 1979 to 2019, their average income from wages and other market income grew by only $13,100, but their net government transfers (transfers less taxes) rose by $22,600.  

Accordingly, the income growth within the middle class has derived primarily from increasing net transfers, not market income.  

For the 40 percent of households with the lowest incomes, growth in net transfers dominated growth in market incomes even more. By contrast, across all households, average income just about doubled, mainly reflecting large gains in market income at the top of the income distribution.  

To be clear, these are different people in 2019 than the earners from 1979. In particular, workers have become more likely to fall into the lower relative income categories. 

This trend took place under Republican and Democratic presidents alike, and the point of it has nothing to do with the merits of these transfer (and tax) changes. The point, rather, is that people do not count these sources of income the same way as the cash they receive as a reward for work — if they count them at all. 

Consider how inflation-adjusted lifetime Social Security and Medicare benefits for a couple with average and low wages over their lives have grown from a bit over $500,000 for a couple turning 65 in 1970 to more than $1 million for a similar couple in 2005 and are scheduled to reach over $2 million in 2050 for a similar millennial couple aged 40 in 2025. 

From my experience, only a few people, even economists who study retirement, know the value of their lifetime benefits or how they fare relative to their parents.  

Social Security and Medicare beneficiaries are highly unlikely to think to themselves, “Wow, look at all the government has given me. I’m so grateful to those politicians who made this possible.” Most say, “I’m entitled to this money,” whatever its level. Most incorrectly add, “The government didn’t give me anything. I paid more than I got back. If there’s a shortfall, it’s because the trust funds were raided.”

Few understand that their Social Security and Medicare taxes went out almost immediately to pay benefits to their parents’ generation, and that their current entitlement claim to higher benefits than their parents rests partly on a claim to an ever-higher share, not just amount, of income earned by their children. 

How about the increased value of health care? Few individuals count gains in the value of health insurance as additional income. Even researchers at the Census Bureau or academia fail to count those benefits as income in most survey studies.  

Yet, over recent decades, more than 25 percent and often 30 percent of the per capita growth in real income has been spent on health care. Yes, prices have risen, but so have real benefits. Better surgeons, drugs and equipment keep us alive longer and offer more cures than previous generations knew. 

The government covers around two-thirds of all health spending through Medicare and Medicaid, exchange subsidies under Obamacare, veterans and other benefits, health benefits for federal, state and local workers, and various tax subsidies.  

The story of hidden income growth applies to employer-provided health insurance as well. Much of the gain in total compensation for low-to-average-income employees in firms providing health insurance has come from the increased value of the health insurance provided. 

Do they feel great when their cash wages can’t keep up with inflation even while the real “value” of their employer subsidies for health insurance rises? Or when the value of their employer-provided health plan rises but they get caught with a personal health bill of a few thousand dollars?   

People also don’t tend to count as income growth the various improvements in air safety, cleaner water, school buildings, better highways and other government services. They do know about the failures. 

In a recent post, I noted how the confusing debate over inequality, largely dependent upon what different researchers count, distorts policymaking. Here, I add a simple corollary. Dissatisfaction with the economy and government policy is derived significantly from sources, not just the amount, of income people receive. 

Want a more satisfied public? Then figure out ways to enhance their dignity, self-respect, sense of accomplishment and belonging — not just their consumption. Compensating those with declining shares of market income, particularly wages, with more net transfers, mainly in retirement support and expensive healthcare, will not be enough. 

And they won’t be thankful for it, either. 

Eugene Steuerle is a fellow at and co-founder of the Urban-Brookings Tax Policy Center in Washington, D.C.