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The Case for Entitlement Reform: Taxpayer Contributions Fall Dangerously Short of Received Benefits

Posted By Kathryn Nix On February 28, 2011 @ 5:00 pm In Economics | Comments Disabled

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Medicare and Social Security are important retirement security programs for millions of Americans. But they are ticking time bombs with trillions in future unfunded obligations that will bankrupt America if they are not changed. Though awareness of this critical situation continues to grow, Americans remain reluctant to support reform, understandably fearful of the prospect of paying into a program and then not receiving what they paid for. As Ricardo Alonso-Zaldivar wrote for the AP [2], “You paid your Medicare taxes all those years and think you deserve your money’s worth: full benefits after you retire.”

But recent research from the Urban Institute’s C. Eugene Steuerle and Stephanie Rennane [3] shows that Americans actually receive benefits well in excess of what they pay in. The truth is, American taxpayers do not actually pay for their own future retirement benefits. Instead, their tax dollars pay for current Medicare and Social Security beneficiaries. Steuerle writes [4], “The complication is that [recent retirees'] Social Security taxes mainly supported their parents in retirement, and the only way they can do as well in a money-in-money-out (at times partially funded) system is to foist higher tax rates on their children.”

As the baby boomer generation begins to retire in 2011 and the growth rate of medical costs continues to increase, the cost of Medicare in particular will soar. To call the current trajectory of spending on this program unsustainable is an understatement. It would require raising taxes on the children and grandchildren of retirees to unrealistic rates that would devastate the United States economy.

Steuerle and Rennane’s data [3] show just how significant the problem really is. Take for example a married couple who turned 65 in 2010 and earned the average wage (in 2010 dollars) of $43,100 each. This couple will have paid a total of $690,000 in Social Security and Medicare taxes, but will receive $882,000 in total benefits over their lifetimes.

The trend extends to Americans of all earning levels. A one-earner couple earning the average wage and retiring in 2010 will pay $345,000 into the system, but receive $778,000 in benefits. And a single man earning the same wage will pay $345,000 into the system but receive $417,000 in benefits.

Clearly, current benefit levels greatly exceed what citizens pay into the system. According to Steuerle [4], “To pay for the rest, we borrow from China and elsewhere, and use up ever-larger shares of income tax revenues, leaving ever-smaller shares for other government functions. Bottom line: without reform, current workers would continue to shunt many of their future Medicare costs onto younger generations, just as their parents did with Social Security.”

The best way forward in Medicare reform [5] is to transform the program into a premium support system, allowing seniors to use a federal contribution to purchase a health plan that best suits their needs from a wide array of options. This would control the cost of the program while allowing seniors to receive the best value for their health dollars. It has received bipartisan support over the years and is supported by younger Americans, who stand to receive the short end of the stick under the current path. An Associated Press-Gfk poll [6] found that 47 percent of those born after 1980 favored moving Medicare to a voucher system compared to 41 percent who did not.

Though President Obama and liberals in Congress continue to resist serious entitlement reform, the facts show that there really is no other choice.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/02/28/the-case-for-entitlement-reform-taxpayer-contributions-fall-dangerously-short-of-received-benefits/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/doctor_bill0906235.gif

[2] As Ricardo Alonso-Zaldivar wrote for the AP: http://news.yahoo.com/s/ap/20101230/ap_on_he_me/us_medicare_money_s_worth

[3] recent research from the Urban Institute’s C. Eugene Steuerle and Stephanie Rennane: http://www.urban.org/UploadedPDF/social-security-medicare-benefits-over-lifetime.pdf

[4] Steuerle writes: http://crfb.org/blogs/my-view-gene-steuerle-3

[5] The best way forward in Medicare reform: http://www.heritage.org/Research/Reports/2010/12/How-to-Fix-Medicare-A-New-Vision-for-a-Better-Program

[6] Associated Press-Gfk poll: http://www.newsvine.com/_news/2011/01/27/5936466-house-gop-considers-privatizing-medicare

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