The Congress, the President, and various commissions have begun discussing real Social Security, Medicare, and Medicaid reform. This paper suggests that as these discussions move forward, it would be helpful to examine lifetime contributions and benefits for Medicare and Social Security to understand the programs' internal fiscal situations and their broader role in overall budget policy and, most importantly, as a way toward a more unified and coherent approach to entitlement reform for seniors. This approach also provides a useful window on how equitably lifetime benefits and taxes are distributed and on the fiscal stability of the overall system.
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Over the past year, Congress, the President
and several commissions have advanced
numerous proposals to reform our big-ticket
senior entitlement programs. These ideas
are expected to receive continued attention
in the coming months as the new “super
committee” formed by the debt ceiling
agreement develops its deficit reduction plan.
As these discussions move forward, we think
it is helpful to examine lifetime contributions
and benefits for Medicare and Social Security
to understand the programs' internal fiscal
situations and their broader role in overall
budget policy and, most importantly, as a way
toward a more unified and coherent approach
to entitlement reform for our seniors.
Lifetime Contributions and Benefits
Our recent analyses of lifetime contributions
and expected benefits in Medicare show that,
over a wide range of scenarios, beneficiaries
retiring at age 65 in 2011 can expect to receive
dramatically more in total benefits than they
have paid in dedicated taxes. For example,
single beneficiaries and dual-earner couples
who had earned the average wage throughout
their working careers can expect to receive
about $3 in Medicare benefits for every $1 paid
in Medicare payroll taxes. If only one member of the couple had worked,
we calculate a six-fold difference between
contributions and benefits since both spouses
are eligible for Medicare yet only one has paid
taxes. Higher earning workers will have paid
somewhat higher Medicare taxes, but their
expected lifetime benefits still far outpace their
Social Security benefits and contributions
come closer to balancing out over the lifetime
for many beneficiaries (middle panel), but
the one-earner couple again comes out
far ahead due to a Social Security system
that was designed decades ago around the
stereotypical family of the past, with a working
father and a stay-at-home mother. While a
single woman who worked a full career at
the average wage can expect to receive Social
Security benefits roughly in line with her
payroll contributions, a married woman who
never worked but whose husband paid the
same taxes as the single woman can expect
to receive about $180,000 in spousal and
survivor benefits. Unlike private pensions,
these additional benefits are essentially free
but only to those who are married, regardless
of need, contributions or any child rearing.
They are financed by all Social Security
taxpayers, including single mothers who get
no spousal or survivor benefits at all.
Examining both programs together (bottom
panel) highlights the large dollar value of
benefits being paid out and the fact that total
lifetime benefits consistently outweigh lifetime
contributions across a range of scenarios. It
is no wonder these programs now account
for one-third of all federal spending each
year. Furthermore, our projections for people
retiring in 2030 (data not shown) reveal
a continuation of the difference between
benefits and contributions under the current
unsustainable structure of these programs.
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