The United States' welfare system is so inefficient that we could become a social democracy without spending another penny

Image: The Ford Pinto was such a poorly designed car that it was literally a death trap. Imagine if you had to choose between a Ford Pinto and a higher quality, safer car, for the same price. (source)


My previous post on the incredible inefficiency of the American welfare state showed how a median income American household must pay about 50% of their income in taxes and private spending for social welfare, while a household with that income in a social democracy would only spend about 40%--and get far more for the money. See the full piece for caveats, but it's clear that social democracy is a better deal; even though the typical citizen pays less, every single citizen gets many benefits--like paid parental leave, a month of paid vacation, a month of sick days, paid extended sick leave, child care, etc--that very few Americans get. Americans love to cry foul at 40% tax rates in Scandinavia, while remaining curiously silent about paying 25% of their income for private employer-sponsored health insurance.

But there is another way to measure the incredible inefficiency of the American social welfare system. It's not just a bad deal at an individual level--it's a bad deal at a national level as well.

The OECD collects data on how much money is spent on social welfare in member countries--both private and public spending. The verdict? The United States is comparable to the social democracies, spending 30% of GDP on social welfare. The social democracies spend 30-33% of GDP on social welfare; Norway only spends 25%. Here is the OECD's graph of their data (which I modified for clarity, underlining the USA and the social democracies (Norway, Finland, Austria, Denmark, and Sweden) in red):

(click to see graph unobscured by side bar)

Yes, we spend just as large a portion of our GDP on social welfare as Finland, more than Norway, and slightly less than Austria, Sweden, and Denmark. This may be difficult to believe, because--as I explained in the previous post--social democracies offer higher service quality and universal coverage. That they provide better services to more people with the same investment is testament to the utter folly of the American welfare system.

[Update 07/07/2014: In case you think that these numbers are some fluke* based on the unprecedentedly high cost of health care in the United States, and that--somehow--the fragmented public-private model we rely upon for health care might somehow work for child care, long term care, or some other social welfare service--a recent study found that the government-run, universal, social democratic long term care systems of Germany and Japan--despite achieving universal coverage--are far less expensive than the long term care system in the United States:

In Germany and Japan, social insurance programs are universal, support family caregivers, and allow individuals considerable flexibility in securing the services they require...when we compared public spending on long-term care, we found that spending in the United States is actually higher than in Germany even now, prior to enactment of the CLASS Act, and is only slightly lower than in Japan.

(The CLASS Act was ultimately repealed). Obviously, once private spending is counted, the American long term care system as a whole is far more expensive than either Germany or Japan's system, despite enormous gaps in the American system. Universal, social democratic systems are very efficient, no matter what the benefit.

*As if the design of the American health care system is somehow not responsible for its own cost inflation.]

Here is a chart I modified from my first post on this issue to show this incredible inefficiency more clearly. Percentages indicate the percentage of citizens covered by each benefit; "universal" indicates 100% coverage.

Let's take each row of this chart in turn:

• At the end of 2013--on the eve of the implementation of Obamacare--the United States' health uninsurance rate reached 18%. With Obamacare in place, the 2022 projection is that 8% of American citizens--not counting undocumented immigrants--will be without health insurance.
• Social Security covers unemployment, disability insurance, and survivors insurance which are nearly universal; Supplemental Security Income makes disability and survivors benefits coverage as close to universal as feasible. Survivors benefits are payments to children (until they turn 18) and widows to replace the wages lost by the death of an adult family member.
• Primary and secondary education are obviously free in the United States, though many choose to buy out of the system and pay for private education.
• Long term care insurance indicates nursing home level of care; it's for people who are so severely disabled, grievously injured, or with such serious health problems (like Alzheimer's disease) that they need 24-hour supervision by nurses. In the United States, Medicaid covers long term care for all people, but it will only kick in if you are nearly bankrupt because of your medical bills (until you have less than $2000 to your name, you are ineligible; they verify that for the last five years you have not transferred large sums of money to relatives). 
• Social Security offers universal retirement income, and it does a fantastic job of reducing elder poverty. However, it's impossible to say that Social Security provides enough of an income in old age; this post takes this idea much further. At the very least, experts recommend that you save 10% of your income for retirement, so it's clear that a huge amount of retirement security does not come from Social Security and is not equitably distributed (more here).
• There doesn't seem to be a good estimate of children who have access to child care but it is certainly low due to the extraordinary cost
• Paid parental/family leave is offered by very few American employers. There is no legal mandate to provide parental or family leave. Among American companies that do offer parental and family leave, it is quite stingy--a mean of 7 weeks to mothers and 3 weeks to fathers, compared to a year or more for both parents in the social democracies.
• CEPR notes that just 57% of US workers have paid sick days, let alone extended paid sick leave, and that data on extended paid sick leave are not even available. The FMLA makes it illegal for employers to fire workers if they take up to 12 weeks of unpaid parental, family, or extended sick leave, but it only covers 60% of American workers. Paid extended sick leave is available to anyone in a social democracy so they can recover from surgery, recover from serious injuries, etc, and typically replaces 75-85% of income.
• It made no sense to include college tuition in this chart since many people choose not to go to college. But don't forget that college tuition is a part of social welfare. College tuition in social democracies is free.
• The same caveats I discussed in the previous post (particularly about inferior quality of American social welfare services) still apply.

This highlights an important point I couldn't make with the data in my previous post. Social democracy isn't a better deal for a median income citizen because the rich are used as piggy banks to finance services for everyone else. Quite the opposite--social democracies tax regressively. Rather, as the OECD graph conclusively shows, social democracy is a better deal because it is so much more efficient. A dollar spent on social welfare in a social democracy goes so much farther than a dollar spent in the inefficient American system.

The OECD's graph doesn't take into consideration the fact that the United States' per capita GDP is around 20% higher than the social democracies (except Norway, which has a higher per capita GDP than the United States) (Wikipedia's organization of OECD's messy data tables on per capital GDP). (Remember, the idea that a country's welfare state has a powerful effect on GDP growth is entirely inconsistent with available data).

For the same investment (as a percentage of GDP), social democracies offer 100% of their citizens more--and better--services than all but the richest Americans can afford.

The conclusion is clear. If we're going to spend 30% of our GDP on social welfare, why not spend that 30% smarter? If we know we can provide everyone with more and better services than are currently available to the vast majority of Americans--for the same price--why wouldn't we? (I addressed the answer to this question in the last section of the previous post on this issue and don't need to repeat it here). In other words, if we're going to spend as much on social welfare as Finland does--why not spend it like the Finns do?