How Lifetime Benefits and Contributions Point the Way Toward Reforming Our Senior Entitlement Programs

Abstract

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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Introduction

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 lifetime contributions.

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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