Global Economy
The entitlement burdens in US and Ireland; Irish welfare budget doubled to 17% of GNP since 2001
By Michael Hennigan, Founder and Editor of Finfacts
Jul 29, 2011 - 5:17 AM

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Public spending woes in the US and Ireland highlight the cost burdens of entitlement programs but they are difficult challenges to tackle as the well-off fight for the same safety net as the poor. The Irish welfare budget in 2010 more than doubled to 17% of GNP (gross national product) since 2001.

In The Washington Post today, columnist Robert Samuelson writes that  in 1960, national defense was the government’s main job; it constituted 52% of federal outlays. In 2011 - - even with two wars - -  it is 20% and falling. Meanwhile, Social Security, Medicare, Medicaid and other retiree programs constitute roughly half of non-interest federal spending.

With people living up to 20 years after hitting the retirement age of 65, healthcare in America already accounts for more than 17% of GDP (gross domestic product) and is likely to rise further.

According to the Organisation for Economic Cooperation and Development (OECD), as a share of GDP, the United States spent 17.4% on health in 2009, 5 percentage points more than in the next two countries, the Netherlands and France (which allocated 12.0% and 11.8% of their GDP on health). Norway and Switzerland were the next biggest spenders on health per capita, with spending of more than $5000 per capita in 2009.  Ireland was at 9.5% of GDP.

Robert Samuelson says by 2035, the US 65-and-over population will nearly double, and health costs remain uncontrolled; the combination automatically expands federal spending (as a share of the economy) by about one-third from 2005 levels. This tidal wave of spending means one or all of the following: (a) much higher taxes; (b) the gutting of other government services, from the Weather Service to medical research; (c) a partial and dangerous disarmament; (d) large and unstable deficits.

Samuelson says while 70% of respondents in a Pew Research Center poll judged budget deficits a “major problem,” 64% rejected higher Medicare premiums and 58% opposed gradual increases in Social Security’s retirement age.

He says what sustains these contradictions is a mythology holding that, once people hit 65, most become poor. This justifies political dogma among Democrats that resists Social Security or Medicare cuts of even one dollar.

The Kaiser Family Foundation reports the following for Medicare beneficiaries in 2010: 25% had savings and retirement accounts averaging $207,000 or more; among homeowners (four-fifths of those 65 and older), three-quarters had equity in their houses averaging $132,000; about 25% had incomes exceeding $47,000 (that’s for individuals, and couples would be higher).

Robert Samuelson said last May that half the nation’s wealth is owned by people 55 and older (a third of the adult population), report Eugene Steuerle and Stephanie Rennane of the Urban Institute.

In Ireland, separate from the social welfare budget is the cash cost of public sector staff pensions which jumped by 66% in the period  2005-2010.

Public staff pensions now account for 12.9% of the total Pay and Pension Pay bill, up from 9% in 2005. Overall, the pensions bill has increased from €1.35bn in 2005 to €2.23bn in 2010 representing a 65.6% increase over the period (pay in contrast rose by 10.8%).

The real annual cost of Irish public staff pensions is however about €5.1bn (including an annual actuarial accrual) and the cost of an additional year for judges is 62% of salary net of personal contributions.

Finfacts article, July 2010: Irish public sector pay/pensions to rise 16% in period 2005-2010; Pay up 11%: Pensions up 66%; Pensioner numbers rise 43% to 103,400

Finfacts article, Apr 2010: Surreal Ireland: Real annual cost of Irish public staff pensions at €5.1bn; Cost of added year for judges at 62% of salary

As for the welfare budget, the Department of Social Protection recently published Statistical Information on Social Welfare Services 2010 (pdf), which shows that the welfare budget has jumped from 8% of GNP in 2001 to 16.7% in 2010.

What is striking about the annual spending of €21bn is that despite having high cash payouts compared with for example the UK, there are a huge number of schemes including payments for furniture as well as telephone and electricity discounts for some rich people.

Direct unemployment supports account for 27% of the total spending.

One legacy from the boom is that there are about 78,000 foreign nationals on the Live Register, which including dependents could put the total above 200,000.

The number of welfare recipients has jumped from 900,000 in 2001 to 1.4m in 2010. The number was 1m in 2007.

The number in receipt of a pension from the State was 276,065 in 2001 and 393,825 in 2010.

Short-term payment rates for a single person in 2010 were 80% above the 2001 level, compared with a 22% rise in consumer inflation. Its a similar pattern for other categories.

Rent allowance cost €804m in 2010, up on 2009 but about half the peak level of the boom.

As for the rise in the number of older people, Brendan Walsh, professor emeritus of economics at UCD, says the death rate among the population aged 65 and over has fallen from 70 per 1,000 in 1999 to 40 per 1,000 last year, with a 4.8% fall in 2010 alone.

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