Sorry, seniors, you didn't pay for (all of) that

The AARP-formerly known as the American Association of Retired Persons-is shamelessly (and irresponsibly) trying to convince seniors to run to their members of Congress to prevent cuts to Medicare. Why? Because "we worked hard for those benefits; we earned them."

Would that this were true! Reality is that promises to Medicare recipients vastly exceed the payroll taxes to be collected from those receiving them to the tune of $105 trillion!

Talking about trillions, tens of trillions, or hundreds of trillions of dollars makes most people's eyes glaze over. It's simpler to talk about individual Medicare recipients. Fortunately, researchers at the Urban Institute have done these difficult calculations and produced some eye-opening numbers. They have calculated the lifetime payroll taxes and lifetime benefits for both Social Security and Medicare, showing that the AARP claim that seniors have "earned" their Medicare is less than a half truth at best.

The reality is that a male earning an average wage over his lifetime will receive from Medicare lifetime benefits in retirement that amount to $180,000.[1] Lifetime Medicare taxes for this average male would have amounted to only $61,000. Thus, over a lifetime, such an individual would have "earned" through payroll taxes only about one-third of their Medicare benefits. For a female earning the average wage, the situation faces even great discrepancy. Because she will live longer, her lifetime benefits will amount to $207,000 even though she will have paid in the identical amount of payroll taxes over a lifetime. In short, she will collect $146,000 more in benefits than the taxes she paid into the Medicare trust fund.

The accompanying chart summarizes the net amount of Medicare benefits received by average earning seniors above and beyond their lifetime payroll tax contributions. As the data show, the problem is growing larger with each new cohort of seniors. The net benefit to seniors who retire in 2020 is roughly double the amount received by seniors who retired three decades before.

The situation is quite different for Social Security. The average earning male who retired in 2010 paid $300,000 in lifetime payroll taxes for Social Security, but will receive only $277,000 in lifetime benefits from that program. For females, the lifetime benefits ($302,000) almost exactly equal lifetime taxes. Thus, the AARP line of reasoning is much more accurate and applicable when discussing Social Security than Medicare.

Moreover, the disconnect between lifetime taxes paid and lifetime benefits is shrinking in the case of Social Security. That is, by 2030, the average-earning male will collect only 84 cents in Social Security benefits for every dollar paid in taxes.  Even the average-earning female will collect only 90 cents per dollar of payroll taxes. In contrast, one-earner couples collect much more in benefits than the family breadwinner paid in taxes

In short, AARP is not contributing to an honest dialogue about our entitlements mess when it tries to mislead seniors into thinking they have already paid for their Medicare benefits. If this were true, the moral argument for making these promises sacrosanct would be more compelling. But since it is not true, it is perfectly reasonable (I would argue imperative) that policymakers not be bullied into avoiding some hard choices. There's a raft of reasonable approaches that might be considered to begin chipping away at this enormous problem: raising the Medicare eligibility age to match that of Social Security is just one example.

Knowing that the average senior gets $3 in Medicare benefits for every dollar in payroll taxes does not point the way to any specific solution. But it should make crystal clear that the status quo is unsustainable. Seniors of today, tomorrow, and unborn generations all would be better served by our boldly tackling this problem sooner rather than later.

"We can do better" than following the advice of an advocacy group based on a very flawed premise. Let's be honest: the surest path to destroying Medicare as we know it is to do nothing. The only way to preserve it for future generations is through major reforms. The fiscal cliff actually offers a terrific opportunity to stop kicking the can down the road and to instead begin putting ourselves on a more sustainable path for Medicare.

Footnotes

[1] All the figures shown are constant dollar (inflation-adjusted) estimates in 2012 dollars. They are present values calculated using a 2 percent real discount rate. This means that the value of a dollar paid next year is 2 percent less than a dollar of benefits paid today. The figures are calculated using the alternative fiscal scenario used by the Medicare actuary that take into account the current (long-standing) policy of canceling scheduled cuts in Medicare payment rates to physicians and other scheduled spending reductions that might compromise access to care for seniors. Readers are encouraged to read the full Urban Institute report for details.

 

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Christopher J.
Conover

  • Christopher J. Conover is a Research Scholar in the Center for Health Policy & Inequalities Research at Duke University, an adjunct scholar at AEI, and a Mercatus-affiliated senior scholar. He has taught in the Terry Sanford Institute of Public Policy, the Duke School of Medicine and the Fuqua School of Business at Duke. His research interests are in the area of health regulation and state health policy, with a focus on issues related to health care for the medically indigent (including the uninsured), and estimating the magnitude of the social burden of illness. He is the recent author of The American Health Economy Illustrated and is a Forbes contributor at The Health Policy Skeptic.


    Follow Chris Conover on Twitter.

  • Phone: (919)428.4676
    Email: chris.conover@duke.edu

What's new on AEI

image The Census Bureau and Obamacare: Dumb decision? Yes. Conspiracy? No.
image A 'three-state solution' for Middle East peace
image Give the CBO long-range tools
image The coming collapse of India's communists
AEI on Facebook
Events Calendar
  • 14
    MON
  • 15
    TUE
  • 16
    WED
  • 17
    THU
  • 18
    FRI
Wednesday, April 16, 2014 | 10:00 a.m. – 11:00 a.m.
Calling treason by its name: A conversation with Liam Fox

Join us at AEI as the Right Honorable Liam Fox sits down with Marc Thiessen to discuss and debate whether America’s intelligence agencies have infringed on the personal privacy of US citizens.

Thursday, April 17, 2014 | 4:00 p.m. – 5:00 p.m.
The curmudgeon's guide to getting ahead

How can young people succeed in workplaces dominated by curmudgeons who are judging their every move? At this AEI book event, bestselling author and social scientist Charles Murray will offer indispensable advice for navigating the workplace, getting ahead, and living a fulfilling life.

Event Registration is Closed
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.