Millennials: Today’s Underserved, Tomorrow’s Social Security and Medicare Bi-millionaires?

When America’s Social Security system was first established in 1935, the public was deeply concerned about the fate of our elderly, who were then on average poorer than the rest of the population, less capable of working, more likely to work in physically demanding jobs, and less likely to live close to two decades past age 65. Today’s concept of Social Security was actually only one part of an act aimed at meeting the needs of the poor, old, needy, and unemployed of all ages.

In the early decades through the 1960s, Congress expanded old-age supports largely to cover important gaps such as spouses and survivors, disability, health insurance and inflationary erosion of benefits. Today, however, Social Security grows based on past laws that preordain increases in old-age support, largely independent of how the needs of the elderly and nonelderly have evolved or will evolve.

In a newly released study, Caleb Quakenbush and I find that a typical couple retiring today is scheduled to receive about $1 million in cash and health benefits; many millennials will receive $2 million or more. In effect, we’ve now scheduled many young adults to be future Social Security and Medicare bi-millionaires. And the growth continues; the succeeding generation, born early in the 21st century and sometimes referred to as the homeland generation or generation Z, is scheduled for significantly higher benefits. Add to these amounts additional Medicaid expenditures that also go to many elderly if in a nursing home for any extended period of time. (These figures are “discounted”—that is, they show what amount would be required in a saving account, at age 65, earning real interest, to provide an equivalent level of support.)

In fact, a very high proportion of all growth in federal government spending over the next several decades is currently scheduled for Social Security and Medicare. Almost all other spending, whether for children or defense, infrastructure, or the basic functions of government, already is held constant or in decline in absolute terms, and sometimes in a tailspin relative to the size of the economy and the federal government. Only other forms of health care and retirement support, interest costs, and tax subsidies are on the rise.

Such developments are hardly sustainable. Simple math tells us that they will continue to impose costs that the millennials and younger generations are already experiencing: cuts in other benefits for them and their children, higher taxes, and reduced government services when they are in school, working, or middle-aged.

Next time you read a headline on growth in student debt, the falling real value of the child credit, declines in federal spending on education and infrastructure support, or fewer soldiers and sailors, keep in mind that these stories all follow as a consequence of where past Congresses have directed almost all government growth. Of course, governments almost always spend more as an economy and the tax base expand, whether the size of government relative to the economy grows, stays constant, or declines. But past governments traditionally allowed future legislators and voters to choose what to do with those additional revenues; they weren’t stuck with leaving that decision to prior legislators.

How did we get here? As Congresses and presidents added to Social Security over the years, it became more generous. Health insurance was expanded to cover hospitals and doctors, then more recently under President George W. Bush, drug benefits. Cash benefits were raised through various enactments under Republican and Democratic presidents alike.

One big culprit is the retirement age, which, by remaining stable on the basis of chronological age, does not remain stable on the basis of years of support, which increase as people live longer. A typical couple retiring at the earliest retirement age now receives benefits for close to three decades, which is roughly the expected lifespan of the longer living of the two. Spend $25,000 (discounted) per year on each person, but then do it for 20 years or so per person, and you come up with a figure like $1 million for a couple.

Since the 1970s, real annual benefits have also been growing automatically as wages rise. In fact, the combination of “wage indexing” and failure to adjust for life expectancy schedules Social Security to rise forever faster than the economy.

Then, of course, there are the health care costs. People are getting more years of medical support as they live longer. Plus, the federal government has never effectively tackled the increasing costs that result almost inevitably in a system where you and I can bargain with our doctors over whatever everybody else should pay to support our next procedure or drug.

By the way, none of these calculations account for the decline in the birth rate and its effect on the number of workers available to support such benefit growth. Roughly speaking, the taxes available to support any system decline by about one-third when the ratio of workers to retirees falls from 3:1 to 2:1.

We’ve traveled a long distance from 1935’s legislation and its goal of addressing the needs of people of all ages.

2013 Update on Lifetime Social Security and Medicare Benefits and Taxes

Our updated numbers for lifetime Social Security and Medicare benefits and taxes are now available, based on the latest projections from the Social Security and CMS actuaries for the 2013 trustees’ reports for OASDI and Medicare. Couples retiring today, with roughly the average earnings of workers in general, as well as average life expectancies, still receive about $1 million in lifetime benefits. This number is scheduled to increase significantly for future retirees and is higher for those with above-average incomes and longer life expectancies.

Little has changed on the Social Security side from our previous estimates, as the program has undergone no significant reform in recent years. Our estimates of present values of Medicare benefits for future retirees have decreased slightly from last year as slower health care cost growth has made its way into projections. By 2030, Medicare benefits (net of any premiums paid) are about 90 percent of last year’s estimates, still a significant multiple of Medicare taxes paid. (As in 2012, our numbers incorporate a Medicare cost scenario that assumes the “doc fix” and other adjustments will be extended, not the “current law” scenario in the trustees report.)

We have been publishing these numbers for a long time—and not without controversy over our intent. Our hope is simply that better and more complete information will help elected officials decide whether Social Security and Medicare are distributing taxes and benefits in the fairest and most efficient way possible, a decision we do not believe possible by looking only at annual numbers or how current, not future, retirees and taxpayers might fare. Therefore, we are delighted that in its most recent Long-Term Budget Outlook, the Congressional Budget Office for the first time also published estimates for lifetime Medicare benefits and taxes, as well as Medicare and Social Security combined. Using a slightly different methodology, CBO produces very complementary results. Differences derive from it using median-wage (rather than average-wage) workers, a 3 percent (rather than a 2 percent) real discount rate, and an assumption of Social Security claiming at 62 (rather than 65). As CBO also notes, expected benefits (and taxes, to a more limited extent) have grown over time for a number of reasons, including longer life expectancies, higher incomes, and rising health spending per person.


On Dementia, Cost-of-Living Adjustments, and the Right Way to Reform Programs for the Elderly

While the increase in dementia among the elderly and the president’s proposal to change the index used to provide cost-of-living adjustments (or COLAs) to Social Security recipients have both received prominent headlines recently, the discussions have largely been independent of one another. Yet any principled attempt to reform our elderly programs, including Social Security, Medicare, and Medicaid long-term care, should consider them together.

A well-designed reform of elderly programs could and should accommodate some of the cost problems associated with dementia by back-loading a larger share of benefits in Social Security to older ages when these and other needs of old age increase. COLA adjustments, whatever their other merits, front-load the system by cutting back on benefits for the oldest the most and those in late middle age or their 60s hardly at all. That the president and Congress have limited ability to engage in these types of discussions and tackle multiple goals at the same time is yet one more example of how our political processes increasingly block us from fixing what ails us.

In a well-cited RAND study, Michael Hurd and his coauthors estimate that dementia-related care purchased in the marketplace will cost somewhere close to $0.25 trillion in 2040 (in 2010 dollars). That sounds like and is a lot of money, but Social Security and Medicare are expected to rise to cost over $3.5 trillion in that same year. Although I am greatly simplifying by ignoring such factors as how much of the $0.25 trillion would be covered by individuals and not the government or the effect of entitlement reform on costs, the raw comparison speaks for itself.

Simply put, some of the private and public budget problems associated with dementia, Alzheimer’s, and other growing problems for the older among the elderly could be addressed by providing higher cash benefits in older ages. Whatever the aggregate size of Social Security in general, one could pay for this reform by cutting back on benefits in younger ages of Social Security “old age insurance” receipt. This would not solve all the associated problems of dementia, but it would be a simple, effective, easy-to-administer step in the right direction. And, by concentrating benefits more in older ages, it would encourage working longer at a time when employment rates for the population as a whole are scheduled to decline.

But this is not the discussion we’re having. Instead, the president and many budget reformers put forward a proposal to adapt what many believe is a better measure of cost-of-living or price changes and apply it to almost all government programs, including Social Security. As a technical matter, a COLA adjustment doesn’t affect the growth in initial Social Security benefits for those who retire, only the inflation adjustment they get after they retire. At that point, they get a small annual cut—e.g. 3/10 of 1% the first year, 6/10 of 1% the second year, and so forth—that compounds every year in retirement, so that by the time beneficiaries are in their late 80s or 90s, some 25 or 30 years of lower COLAs add up to a cut in benefits of as much as 10 percent.

Social Security has never adjusted upward the earliest retirement age for increases in life expectancy. Instead, it reduced the earliest age from 65 to 62 in 1959 and 1962. As a consequence, the share of benefits going to those with 15 or more remaining years of expected receipt has risen dramatically over time, and the share to those with, say, less than 10 years of remaining life expectancy has declined. The COLA proposal, even with some very old age adjustments suggested by the president, would add to this long-term trend of making the program ever less available in relative terms for those in truly old age.

This is not to say that the COLA proposal should not be adopted. Who can oppose trying to measure something better? But attempts to fix systems like Social Security and other elderly programs one parameter or adjustment at a time cannot easily meet multiple worthwhile objectives. Similarly, efforts to back-load the system to meet the needs of true old age, as suggested here, should be coordinated with further adjustments—say, in minimum benefits—to avoid discriminating against those with shorter life expectancies.

With or without a better COLA, therefore, reform of Social Security and other elderly programs requires a more comprehensive approach if we are to meet the needs of old age as they evolve over time. Shouldn’t dementia be a higher priority than early retirement?  If we’re going to spend $3 trillion or more annually on Social Security and Medicare by 2040, do we really think that the allocation of those funds be determined by formulas set in years like 1935 or 1965 or 1977, when much of the current system was cobbled together?

Who Is Insured or Not Insured by Government?

One of the many dilemmas surrounding federal health care policies is that the government only partially insures most people when it subsidizes health care, but we want to pretend that once “insured” we are all entitled to the maximum health care available. This puts a lot of weight on the definition of “insurance” and creates misunderstandings about what the government does and does not do.

This issue came up in a column by Bruce Bartlett, who notes that Republicans may now oppose an individual mandate, but they do support (directly or indirectly) a mandate on hospitals to provide emergency care. Moreover, while ignoring their effective support of this mandate, and the effective taxes necessary to pay for it, Republicans maintain that the emergency-care mandate means that everyone has some amount of insurance coverage, however partial it may be.

This debate raises the question of what it means to be “insured.” No government plan covers everything. For those soon to have access to the exchange subsidy available through Obamacare, the “silver” and “bronze” plans that could be subsidized still cover only some costs. Medicaid, in turn, generally pays providers less than do other insurance plans; as one result, the more highly paid (and, often, more highly skilled) providers are less available. Similarly, Medicare does not cover all health services, including long-term care, and some doctors now refuse new Medicare patients, though that system’s payment rate is still higher than Medicaid’s.

You may argue that you want equal coverage—if some people get Cadillac coverage, everyone should. However, no elected official from either party seems willing to raise the taxes necessary to pay for such an expensive system. The reason is obvious: such health care would absorb all the revenue currently raised by the federal government and then some, leaving nothing for other government functions.

Even then, some people would step outside the system and buy a Mercedes policy, so inequality in health care would remain. Thus, the notion that everyone gets the same health insurance coverage, even in the most nationalized health system, is pure myth. But if people are not going to receive the Cadillac or Mercedes coverage from government that others obtain privately, how should Congress design policy with those multiple gaps in mind?

I don’t think there is any easy answer, but I do think that researchers and analysts should be more precise when reporting on “insurance” coverage. For example, the Congressional Budget Office produces counts of how many people would be insured under various options, but such estimates by themselves are misleading. Insured and not insured for what? For instance, if everyone received a simple (say, $5,000) voucher, with few restrictions other than that it must cover health care, almost everyone would buy at least a $5,000 insurance policy. On the other hand, if government dictated that the voucher had to be used to buy an expensive plan that many people couldn’t afford, then supplying a voucher would not produce fairly universal (yet partial) coverage.

Alternatively, one can’t assume that a highly regulated system will automatically provide whatever care is specified, since what it pays affects which providers participate in the system. The implicit assumption—and I am not judging it here—may be that many providers are so overpaid that cutbacks would have only limited effect on the care provided or the quality of the doctors and nurses who would accept a lower-paying career.

The ideal but difficult approach for researchers and budget offices, I think, is to note as best as possible what coverage is provided by regulation or subsidization of emergency rooms, Medicaid, Medicare, exchanges—indeed, of each government engagement in the health care economy. Note the expected gaps, whether in preventive care, higher-priced doctors, drugs, or other services. Finally, compare the extent to taxpayers and insured individuals avoid coverage gaps by paying higher taxes or more for their insurance.

In any case, a dichotomous count of who is “insured” or “not insured” is too simplistic. Almost any government health insurance policy is partial in care and cost. If Republicans want to claim that emergency room care is a type of insurance, then they should also acknowledge what is not insured through that mechanism and the implicit taxes on those who end up covering the emergency room cost. If Democrats want to claim that vouchers provide less insurance than a more regulated system, then they, too, should specify just what additional insurance they claim will be covered, at what cost to whom. Both parties should also make coverage comparisons for systems that are equally cost constrained.

What the Public Doesn’t Understand About Social Security and Medicare

An earlier short highlighted my research with Caleb Quakenbush into how much people pay in Social Security and Medicare taxes over a lifetime, and how much they receive in benefits.  For instance, we found that a two-earner couple making an average wage who turned 65 in 2010 would have paid $722,000 in Social Security and Medicare taxes over their lifetimes, but would receive $966,000 in benefits.

These types of numbers often generate outraged debate over how much seniors are “owed” based on what they “paid in” to Social Security and Medicare.

But there is another, more philosophical, issue that these numbers cannot address.  Americans do not pay their taxes into a personal account that they can take out, plus interest, when they retire.  The money paid into Social Security and Medicare has always been chiefly paid out immediately to older generations.  The only exception has been some trust funds which have always been modest in size and are shrinking.  Thus, Social Security is effectively a transfer system from young to old, and always has been.

We may feel that because we transferred money to our parents, our kids, in turn, owe us.  But we must take into account also how much they can or should afford for this task as opposed to their own current needs for themselves and their children.  Think of a one-family society, where three kids support their parents, but then those three kids have no children of their own (or only one or two children).  What those three kids gave their parents informs us only slightly on what they can or should get from their own children if there are none or fewer of them.  Likewise, when demographics change and there are fewer workers to support an aging population, society has to make adjustments, regardless of what some may otherwise think is “fair” or what they think is their entitlement.

For articles inspired by this research, see a recent PolitiFact.

Retired Couples Receiving More Years of Support under Social Security

Increased time spent in retirement is a driving factor behind rising Social Security and Medicare costs. A couple that stopped working at the earliest Social Security retirement age in 1940 would expect to receive 19 years of retirement benefits; a similar couple in 2010 would expect 28 years of benefits. By 2080, couples could be receiving retirement support for 33 years.

This calculation assumes both partners are the same age and will have average life spans. Partners of different ages and those (often higher-income) couples who expect to live longer, such as nonsmokers, receive even more years of support.

As it turns out, these many years in retirement affect more than Social Security balances. Retiring longer also reduces the share of Social Security benefits spent on recipients in their last (e.g., ten) years of life and the income tax revenues to support other government functions.

Expected Years of Retirement Benefits, Earliest Year of Retirement

Expected Years in Retirement

C. E. Steuerle and S. Rennane,  Urban Institute 2010. Calculations based on mortality data from the 2010 OASDI Trustees’ Report.
Assumption: in a couple, at least one partner is still living. ERA was set at 62 for women in 1956 and men in 1961.

For more on this topic, see Correcting Labor Supply Projections for Older Workers Could Help Social Security and Economic Reform.

Social Security & Medicare Lifetime Benefits

How much will you pay in Social Security and Medicare taxes over your lifetime? And how much can you expect to get back in benefits? It depends on whether you’re married, when you retire, and how much you’ve earned over a lifetime.

I recently published with Caleb Quakenbush “Social Security and Medicare Taxes and Benefits Over a Lifetime: 2012 Update” which updates previous estimates of the lifetime value of Social Security and Medicare benefits and taxes for typical workers in different generations at various earning levels based on new estimates of the Social Security Actuary. The “lifetime value of taxes” is based upon the value of accumulated taxes, as if those taxes were put into an account that earned a 2 percent real rate of return (that is, 2 percent plus inflation). The “lifetime value of benefits” represents the amount needed in an account (also earning a 2 percent real interest rate) to pay for those benefits. Values assume a 2 percent real discount rate and all amounts are presented in constant 2012 dollars.

While no major changes in Social Security or Medicare law have occurred since the last update, these estimates reflect alternative assumptions provided by the Center for Medicare and Medicaid Services (CMS) actuaries that lawmakers will cancel a draconian scheduled cut in Medicare payment rates to physicians and other scheduled spending reductions. The result is significantly higher projected lifetime Medicare benefits than current law assumptions would indicate.

Below is a sample table from the brief, for a two-earner couple both earning Social Security’s average wage measure. This set of calculations assumes that workers retire at age 65.

Two-Earner Couple: Average   Wage ($44,600 each in 2012 dollars)
Year cohort turns 65 Annual Social Security  benefits Lifetime Social Security  benefits Lifetime Medicare benefits Total lifetime benefits Lifetime Social Security  taxes Lifetime Medicare taxes Total lifetime taxes
1960 19,000 264,000 41,000 305,000 36,000 0 36,000
1980 30,800 461,000 151,000 612,000 196,000 17,000 213,000
2010 35,800 579,000 387,000 966,000 600,000 122,000 722,000
2020 37,800 632,000 427,000 1,059,000 700,000 153,000 853,000
2030 41,200 703,000 664,000 1,367,000 808,000 180,000 988,000

More background information on these calculations can be found at:

An Extremely Mucked Up Medicare Debate


Democrats and Republicans Favor Medicare Cuts and Then Deny It

Medicare is taking on a primary role in the presidential race. The discussion often turns to whether the program should continue in its current form, with more direct government controls over costs, or shift its emphasis to vouchers or premium support plans. Let’s try to set the record straight.

Lowering Medicare spending growth over the next 10 years from, say, an additional $500 billion to an additional $400 billion means spending $100 billion less on covered services. It doesn’t matter for budget purposes the source of the saving. It is a benefit reduction.

Both presidential candidates claim to save money on Medicare without cutting benefits.  President Obama says his reforms “will save Medicare money by getting rid of wasteful spending…that won’t touch your guaranteed Medicare benefits. Not by a single dime.” Meanwhile, Governor Romney promises that his “premium support” plan will save money while still providing “coverage and service at least as good as what today’s seniors receive.”

But politicians aren’t the only ones dispensing that free-lunch rhetoric. Even highly respected journalists and researchers get pulled into it.

Consider two New York Times stories. After the first presidential debate, Michael Cooper, Jackie Calmes, Annie Lowrey, Robert Pear and John M. Broder said that President Obama “DID NOT CUT BENEFITS by $716 billion over 10 years as part of his 2010 health care law; rather, he reduced Medicare reimbursements to health care providers.” A few days later, David Brooks cited an AMA study of a premium support plan put forward by vice presidential candidate Paul Ryan and Democratic Senator Ron Wyden, saying that “costs might have come down by around 9 percent with NO REDUCTION IN BENEFITS” [cap emphases mine].

Can you see what is going on? Politicians, reporters, and experts all recognize that cost growth must be brought under control. But they also want to suggest that benefits won’t be reduced—if only we go with a particular approach.

It’s one thing to say that we can spend $100 billion less on health care so we can use the money better for education or tax cuts or paying off our debt. But it’s another thing to pretend that we can get $100 billion more in educational benefits or money in our pockets and absolutely the same quality of health care.

We know from personal experience that certain medical procedures, at the end of the day, are worthless or worse. But there’s no budget line called “worthless health care” that our elected officials can bravely vote to reduce.

Instead, we are left with blunt instruments to control costs. A Medicare board may recommend or members of Congress may elect to cut payments to providers, as they have done many times in the past. One can argue such cutting may not produce a great loss in services, depending upon how providers and consumers react. But no loss whatsoever? Come on! Try lowering government payments for anything—rental vouchers, school lunches, highways—and see if the same services are provided.

Similarly, suppose that Congress puts more Medicare recipients into a premium support system, like Medicare Advantage–type plans run by health maintenance and similar organizations. The system then limits the growth rate of payments to those groups. Again, there’s less money to go around.

Both the regulatory and voucher approaches have a precise accounting correspondence. If the government spends $100 billion less, then it purchases $100 billion less in services and makes $100 billion fewer payments to providers.

Back to the presidential and vice presidential debates. Directly trying to control prices for individual services may not have the same effect as trying to control the total amount paid for all services under a premium, and vice versa. But no candidate can deny that he favors benefit cuts relative to today’s unsustainable promises.

To add to the confusion, each side talks as if some idealized system of cost control or premium support exists. Almost inevitably, we will be taking ideas from both approaches.  We’ll cut back on high reimbursement rates when we believe the effect on actual services would be moderate and, at the same time, use limited budgets to encourage providers to operate more efficiently. For instance, we might lower the payment rates for many operations faster and simultaneously induce more Medicare recipients to opt into groups like Kaiser-Permanente that make many allocation decisions within a fixed budget.

Ferreting out the truth in this Medicare debate also requires looking beyond health care. Benefit losses in health care must be contrasted with benefit gains elsewhere. Yet even health care will likely be much worse if we continue to borrow hundreds of billions of dollars more from unfriendly nations and let excessive debt inhibit economic growth.

Bottom line: both parties favor cutting Medicare benefits, or, more accurately, slowing down the rate of benefit growth. The issue isn’t whether but how this can best be done.