Taxes & Spending

How the Government Subsidizes AARP

At the beginning of his second term in 2005, President Bush launched the most ambitious domestic initiative of his presidency: the reform of the financially strapped Social Security program through a system of private retirement accounts.

This much-needed reform was premised on allowing workers to set aside 4 percent of the 12.4 percent Social Security payroll tax for private accounts. In a series of speeches and town halls meetings, President Bush emphasized the impending financial crisis that would hit the program in the not-so-distant future.

AARP Campaigns Against Private Retirement Accounts

Early on, the Bush proposal met fierce resistance from an unusually united Democratic Party and a well-financed network of special interest groups. By far, the group that did the most to defeat the President’s Social Security reform plan was AARP. AARP (formerly known as the American Association of Retired Persons) is the nation’s largest and most powerful organization ostensibly lobbying for the interests of the elderly. With a claimed membership base of 35 million and revenue of $878 million in 2004, AARP certainly had the most resources of any interest group, conservative or liberal, that was involved in the Social Security debate.

Starting in January 2005, AARP sent mass mailings to its members, spent $5 million on full-page advertisements in 50 major newspapers, and another $5 million on print advertising to foment opposition to the Bush reform plan.

AARP charged that diverting payroll taxes to private accounts would bankrupt the system and lead to massive new federal debt. AARP chief executive Bill Novelli even dismissed the need for sweeping changes in Social Security despite the fact that many experts and most Americans believe it is headed for bankruptcy. The group also asserts that investing retirement savings in the stock market is a dangerous gamble that would expose retirees to unacceptable risks. This argument is particularly hypocritical since AARP offers its members the opportunity to buy 38 mutual funds through its corporate partner Scudder Investments. AARP earned $62 million from investment income in 2004.

Mobilizing its full-time staff of 1,800 and a network of 300,000 volunteers, AARP sent activists to dozens of congressional town hall meetings and generated more than 460,000 phone calls to Congress complaining about the private account plan.  

AARP won the battle. By the beginning of summer, six months after the White House launched the bold reform initiative with such fanfare, the political and media consensus was that private accounts were going nowhere in Congress.

The defeat of private accounts is perhaps the most dramatic example of AARP’s commitment to liberal activism. But it is hardly the first time. AARP opposed tax cuts in both the Reagan and Bush administrations. In 1991, it worked to defeat the nomination of Clarence Thomas to the U.S. Supreme Court. And in 1995, AARP helped the Clinton Administration defeat Congress’ attempt to pass a balanced budget amendment, and a proposal to control soaring Medicare costs.

AARP Gets Millions in Funding From Federal Grants

AARP stirs considerable anger among conservatives for its aggressive advocacy of liberal causes. Of course, as a private nonprofit organization it has the right to take any stand it chooses on a public policy issue. However, the fact that AARP pursues its political agenda using federal dollars especially angers taxpayers, and not just those who have problems with its politics. The AARP 2004 annual report showed that of the $878 million in revenue AARP received that year $83 million came from the federal government through a variety of grants.

Charlie Jarvis, Chairman and CEO of USA Next, estimates that since 1989, “AARP appears to have taken over a billion dollars in taxpayer money in the form of federal grants.”

It is unacceptable that the federal government is subsidizing a political advocacy organization that annually generates nearly $900 million in revenue, much of it through royalties from corporations, and has total assets of $1.6 billion. Dale Van Atta, a journalist who has investigated AARP’s dubious claims to nonprofit status, says AARP is “really a Fortune 500 company that sidelines as a lobbying organization for the Washington staff.”

Indeed, AARP is a most profitable nonprofit. On more than one occasion in its 47-year history, AARP has been the subject of financial scandal for misusing its nonprofit status to make money. In the 1980s, the Internal Revenue Service demanded hundreds of millions of dollars in back taxes from AARP. After nearly a decade of wrangling, the organization finally paid $135 million.

The source of AARP’s considerable wealth is the dozens of products and services the organization sells to its members. AARP teams up with insurance companies, health care providers, financial services firms, credit card companies, rental car agencies, cell phone providers and other businesses to offer its members discounts. AARP hawks the products to its members and collects “royalties” from its corporate partners. AARP generated 40 percent or $350 million of its revenue from “royalties and Service Provider Relationship Management Fees.” In addition, AARP made $93 million from publications advertising. AARP raises only one-quarter, $224 million, from membership dues.

Five Federal Departments Fund AARP

The $83 million that AARP received from the federal government in 2004 funded a range of activities including job training for low-income senior citizens, assistance in helping seniors file their taxes, programs to prevent Medicare fraud, legal aid, housing assistance, and telemarketing fraud prevention. Some of these programs may be worthwhile. However, an organization as affluent as AARP does not need public money to pursue such charitable missions. Another serious problem is that the federal grant program from which AARP draws most of its public money, the Senior Community Service Employment Program, is often wasteful and inefficient. There are many compelling reasons why the program should be abolished.

AARP administers the federal funds through its charitable arm, the AARP Foundation. AARP is a 501(c)4 and, pursuant to the Lobbying Disclosure Act of 1995, is ineligible to receive federal funds. As a 501(c)3 charity that does not engage in lobbying, the foundation is eligible to receive federal grants. According to its 2003 IRS Form 990, the AARP Foundation had total revenue of $89.6 million, most of which comes from the federal grants.

Five cabinet level agencies dispense grants to AARP. The large majority of the money comes from one Department of Labor grant. For the year ending December 31, 2003 when AARP received $68 million in federal funding, the Labor Department gave AARP $63.3 million for its Senior Community Service Employment Program (SCSEP), a job training program for low-income senior citizens. The second largest federal grantmaker is the IRS. That year, the IRS gave AARP $3.4 million as part of the Tax Counseling for the Elderly (TCE) program, which provides volunteers to help seniors complete their federal taxes. The Department of Housing and Urban Development (HUD) gave $626,279 for its Housing Counseling Assistance Program. The Department of Health and Human Services (HHS) gave $444,493 for various special programs, typically legal assistance and Medicare fraud prevention programs. The Department of Justice (DOJ) gave $15,000 for telemarketing fraud prevention.

The Labor Department’s SCSEP grant for the year beginning in July 2004 and ending in July 2005 was $75 million, which accounts for nearly 90 percent of the $83 million in federal grant money AARP received as of December 31, 2004. The proposed IRS grant for the TCE program in fiscal year 2006 is $4.1 million.

The Senior Community Service Employment Program

The SCSEP is a federal job training program for individuals age 55 and older. It was established in 1965 under Title V of the Older Americans Act. The program is administered by the Labor Department’s Employment and Training Administration through grants to nonprofit organizations and state-level agencies. In 2005, the SCSEP budget was $440 million. Under a longstanding funding formula, 78 percent of SCSEP money is allocated to 13 national nonprofit groups and 22 percent to the states. Thus, the nonprofit groups receive about $342 million. AARP is the second largest recipient. The largest recipient is Experience Works (formerly called Green Thumb) with about $86 million.

These grant recipients place seniors with income that is no more than 100 percent of the poverty line in temporary, part-time, minimum-wage jobs at private nonprofits and public agencies. The SCSEP program pays their salaries. Seniors typically work in schools, hospitals, senior citizens’ centers, and on beautification and conservation projects. The goal is that after a few months of work, the seniors will have acquired the skills to work in similar full-time jobs. AARP says 10,000 people are enrolled in its SCSEP program at any one time. It claims it places more than 50 percent of participants in jobs, exceeding the 20 percent goal set by the Labor Department. Nationally, SCSEP supposedly serves 100,000 people each year.

The objectives of the SCSEP program may be commendable, but there are serious concerns about its effectiveness. The Congressional Budget Office (CBO) has repeatedly recommended that the program could be targeted for elimination since the nonprofit organizations, among the best-funded in the nation, are quite capable of bearing the expenses of running senior training programs.

If AARP is truly committed to its job training program it should pay for it from its own extensive resources.

A 2003 CBO report notes the opinions of critics who “maintain that the SCSEP offers few benefits aside from income support.” Indeed, one wonders how many useful skills can be learned doing part-time work at libraries, parks, schools, and other public facilities. The problem with SCSEP is that there is no independent method for measuring its effectiveness in placing trainees in meaningful, long-term jobs. A 2002 article by the Cato Institute noted that SCSEP “grantees measure their own success in meeting program goals. With millions of government grant dollars at stake, recipients have a built-in incentive to issue consistently positive reports.”

The only way to ascertain performance is through the occasional controversy that manages to get press attention. In March 2001, for instance, members of a West Virginia Senate subcommittee on work force development expressed displeasure over how $986,000 of SCSEP money was being spent by county aging programs. Senator Lloyd Jackson (D) said that the “real purpose” of SCSEP isn’t to train workers but “to subsidize the agencies that are getting these workers.” An SCSEP director admitted that the goal of the program is to place 20 percent of workers in the agencies that hire them. The director also admitted that the placement level was low because “some are not as employable as others.” A participant not employed by one agency is rotated to another. Senator John Unger (D) said the SCSEP program sounded more like welfare than job training.

In 2000, the Minnesota Department of Economic Security did a study evaluating the state’s 80 job training programs. The SCSEP program managed by the National Urban League was one of the least effective. The study found that 77 percent of the people who finished the SCSEP program did not move immediately into jobs. Those who did get jobs were the worst paid. SCSEP graduates made just $5.50 per hour compared with state-administered programs that paid anywhere from $10.80 to $20 per hour.

Not surprisingly, state governments and many in Congress believe that the funding formula for the SCSEP program that guarantees 78 percent of grants to nonprofits should be changed to give states more control. In 1999 and 2000, Congress debated changes to the SCSEP funding formula as part of the reauthorization of the Older Americans Act. Republicans pressed for the formula to be changed to give 55 percent to the nonprofits and 45 percent to the states. Of course, AARP and the other groups opposed the change, insisting the current system worked just fine.

Democratic congressmen and the Clinton administration strongly opposed the measure. Defenders of the status quo argued the nonprofits outperformed the states. But grant recipients evaluated their own performance and there was no independent review by the Labor Department. However, the General Accounting Office (GAO) reviewed SCSEP — and it supported a revision in funding to give the states more money and AARP less.

In 1999 congressional testimony, GAO official Marnie Shaul said the 78-22 formula results “in distributions of funds among and within states that do not match the distribution of the needy population.” Shaul said that this restricts the Labor Department’s “ability to allocate funds among the states in a way that ensures that funds are provided to the states where the most needy elderly reside. A majority of funds are not responsive to population changes.”

Despite the GAO’s conclusions, the GOP congressional proposal to increase the state allocation to 45 percent was defeated. President Clinton signed the reauthorization of the Older Americans Act into law without any substantive reforms. This was good for AARP but not good for an effective senior job training program.

Taxpayers Should Be Outraged

It is outrageous that taxpayers are being used to advance AARP’s liberal agenda to expand government and thwart Social Security reform. Even though AARP routinely generates nearly $900 million annually, it receives more than $80 million in federal funding each year and, cumulatively, has probably received more than $1 billion over the last 16 years. The time is long overdue to cut off federal subsidies to AARP and end the unjust practice of publicly funding a highly partisan and controversial interest group.

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