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Social Insurance Benefits Need Not Limit Economic Growth: New Evidence

By: Report of a seminar with Peter H. Lindert and others, prepared by Joni Lavery
Published: September 2007
Health and Income Security Brief No. 10 ~ September 2007

Public programs can help protect Americans from economic insecurity without impairing economic growth, according to participants in a seminar sponsored by the National Academy of Social Insurance (NASI). Providing economic security for families also encourages people to take the risks necessary to foster innovation, which drives productivity.

Economist Peter Lindert finds that high levels of social spending in European democracies have not slowed economic growth, as long as the benefits and taxes are well designed. Social programs that cover nearly the entire population and are financed by broad-based low-rate taxes, such as payroll taxes or value-added taxes, have almost no effect on a country’s ability to grow and prosper. Lindert’s research contradicts the oft-stated assertion that social welfare spending necessarily slows economic growth because the benefits and taxes discourage recipients and taxpayers from being as productive as they otherwise would be.

Political scientist Kimberly Morgan identifies two reasons why social benefits have maintained stronger political support in Europe than in the United States. First, in Europe, the connection between taxes paid and benefits received is very visible. In the U.S., by contrast, the tax system is very visible, but much support for health care, housing and pensions is provided through tax expenditures, which often go unrecognized. Also, European countries place greater reliance on consumption and payroll taxes than on personal and corporate income taxes, which are more progressive and more likely to antagonize powerful groups.

Itai Grinberg, Peter Orszag, Jack Ebeler, and Rudolph Penner provide additional comments on Lindert’s findings. Transcripts and copies of the papers and presentations from the seminar, "Family Well-Being, Public Policy, and Economic Growth: Lessons from History and Insights for the Future" held September 19, 2006 are available here.