Economics, Entitlements, Pethokoukis

If you could only know one thing about the US debt problem, you would want it to be this

040313benefits

Kudos to Jackie Calmes of the The New York Times for a piece that highlights a simple but powerful statistic: Medicare beneficiaries, on average, pay about $1 for every $3 in benefits.

To flesh that out, a single male who earned the average wage and turned 65 in 2010 had paid about $61,000 in Medicare taxes and could expect $180,000 in benefits, according to economist Gene Steuerle of the Urban Institute.

Not sure that passes Bill Clinton’s famous “arithmetic test.” OK, I am being cute. Of course the math doesn’t work — unless you a) don’t mind taxing future generations at confiscatory rates, and b) don’t believe those confiscatory rates will hurt economic growth.

Yet we call these benefits “entitlements.” (I do it all the time.) What they are is an unaffordable, unsustainable subsidy. Language will matter as we debate the best way to reform Medicare.

15 thoughts on “If you could only know one thing about the US debt problem, you would want it to be this

  1. Not everyone will be lucky enough to live to be eighty years old. You projections also assume that the will be negative growth in employees paying into the system. I suggest you run a chart with all the variables showing the possibilities and projections.

    * I’m not saying your lazy, just that your numbers don’t add up.

    • Actually the numbers add up as should always be expected from any entitlement. The fact remains entitlements are a pyramid scheme; they never should have been implemented to begin with, and now the only argument is that they need to be disbanded. They are a bottomless pit of spending that outraces defense spending multi-fold.

  2. I haven’t yet examined these figures, but will eventually. I do know that the indexing for inflation is flawed seriously. Now, in 1967, when I first had Medicare tax taken from me, gas was about 29 cents a gallon; now $3.70. Gold was about $50; now $1600. So…are the dollars they count in their study taking into account what purchasing power was at the time I put money in? Or are they using some overall index which does not accurately reflect contributions? Also…some of those Medicare contributors have died. Their money is just in the pot, with no withdrawal. Not to mention that the money put in was supposed to be in a trust fund, and should have earned value in excess of inflation. Etc.

  3. Neither Calmes nor the NYTimes discovered Medicare’s healthy rate of return: http://www.aei-ideas.org/2009/08/have-seniors-really-paid-for-their-medicare-benefits/

    But the real question is this: How many seniors can pay healthcare bills of $180k in their remaining lives? And even if we means test those who can so they do, where does the rest of the money come from? This exercise leads you to the conclusion that the problem isn’t the tax rate but expenditures that are twice what Canadians would pay. Americans can no longer afford American healthcare.

    • Bingo, it’s absolutely ludricous what we pay and our employers pay in healthcare and healthcare costs. I’m pretty certain there are a lot of fat cats making money off of overdosing Americans on pharmaceutical drugs. Gosh, half of our youth today are on some kind of drug and when my elderly Mother passed away she was taking 15 pills a day! We need to start with the excessive use of legal drugs.

  4. If I had invested all my Medicare payments over the last 40 years in a 401(k), how much would I have today to pay for my own medical expenses?

    • If your Medicare tax amounted to $100/mo and you earned the stock market’s real rate of return of ~7 percent, you’d have $282k for retirement healthcare. (And I sincerely hope you show up at a distant retirement ready to pay your own way.) SSA will tell you there is an disability insurance component in Medicare that you can’t expect to have returned if you arrive able bodied in retirement.

      But the rub in this, in any discussion of healthcare, is that we’re not talking about CPI inflation here. Make the real earnings in your HSA 4.66 percent after inflation in medical costs, and you’ll have $147k to cover $80k in expenses and you’d be out of pocket for long-term disability insurance. And, yes, the average annual healthcare inflation rate since 1948 has been 5.44 percent.

  5. since “benefit” costs are TRIPLE for somebody who doesn’t have insurance, it works out just fine. The problem is that the hospitals seem to scr-ew those without insurance and everybody ought to get the same rate, insured or not.

  6. Social security and Medicare are Ponzi schemes. If a couple making a total of just $60k per year, invested the 15.3% taken by the payroll tax (average $9,180 per year) over a 45 year working career, then at rates of return:
    4% = $1,158,593.87
    5% = $1,556,684.05
    6% = $2,118,876.22
    7% = $2,918,258.72
    8% = $4,061,921.34

    But socialism has destroyed that opportunity, and instead shackled future generations with trillions in unfunded liabilities.

    • I don’t disagree that private accounts are more effective. But your example assumes a constant $60k over 45 years when the comparable wages in 1969 would be closer to $10k. Give the power of compound interest, those early contributions are the important ones. And as I mentioned above, there are disability and death benefits in SS and Medicare that that have not priced. If you were hit by a bus and paralyzed in 1978, your table would better reflect your expenses.

      • Show the calculations done over any way you like. The accumulation, controlling for inflation, will be a nice fat multiple of the sum of the money stream which went in. It will make virtually all lifelong workers into millionaires or multimillionaires. The $65k used here is far below the median household income of actual working households, so it is a modest/conservative assumption.

      • Todd, I would hope your investments kept pace with inflation. Using your example, you could have bought real estate at 1969 prices.

  7. That assumes you put the money in your mattress. What is the value of $60k invested over 47 years???

    But if medicare is underfunded because the people who benefit don’t contribute enough then medicaid is a financial disaster because the people who benefit contribute butkus. So don’t talk to me about how medicare is creating our debt when the total cost of all the 2400 federal welfare programs cost about $1.2 trillion and the lazy-ass recipients don’t contribute anything.

    Medicare can be fixed by increasing that portion of the payroll taxes and increasing copays etc. If congress would do their job there would not be a problem.

  8. To put things in perspective, TODAY, to balance social security and medicare spending, you would have to raise our current payroll taxes to 13% from 7.6% on BOTH individuals and businesses.

    Someone cheeky should propose this tax rise just to raise the debate on spending to see whether people want the tax increase or cuts in expenditures.

    See my blog “Balance Medicare/SS Spending and taxes” at http://gulfcoastcommentary.blogspot.com/2013/01/balance-medicaresocial-security-taxes.html

    Let me know what you think. Thanks.

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