What the Public Doesn’t Understand About Social Security and MedicarePosted: January 30, 2013 Filed under: Aging, Health and Health Policy, Income and Wealth, Shorts, Taxes and Budget 6 Comments »
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.
I think the approach to SS and Medicare taken by this post fails to deal with the important point that SS and Medicare are forms of SOCIAL INSURANCE. The reason why the system works as a compact between the working and retired generation is that each generation that works leaves the world (the nation) more productive and thus leaves the younger generation with higher incomes. Out of these higher incomes, the working generation subsidizes the retirement and expensive health care of the older generations — They can afford this, because of the work that the older generation actually did.
Finally, focusing on the ratio of the working age population to the retirement age population leaves out all the rest of the dependents. The previous generation of retirees didn’t just finance social security as they were working — they also brought up the baby boom generation. For them the total dependency ratio was much higher than the current one (because we have so many less children) and productivity was much lower then as well.
The real long term problem (obscured by the combination of Medicare with SS) is that we have runaway Medical cost inflation. As many have mentioned — if we abolished Medicare tomorrow, rising Medical cost inflation would soon take outrageously high percentages of future workers’ incomes just to pay insurance premiums.
We solve the “entitlements” problem when we solve the medical cost inflation problem — and all other advanced countries have already solved it (each in their own way) so that their ratios of medical expenses to GDP are much lower than ours.
I think you are more than half right. The warranted internal rate of return on social security is the growth in the wage bill that is subject to contributions minus the rise in the old-age dependency ratio. It is less obvious to me how to take into account spending associated with youth dependency. Most of it is private spending for one’s own kids, though maybe there is some social credit arising from property taxes paid insofar as these fund the education of kids in general. You are spot on as regards health care spending. Privatising it is no solution. Cost containment is key. On both scores, things are looking pretty grim. With median wages stagnating and a capped contribution rate (so that the large rise in the wages of high earners don’t feed through) and old-age dependency rising sharply, the warranted return is close to zero or negative. As to health care cost control. all OECD countries have problems here, but those in the US are exceptional. But the entrenched collective power of the providers, the insurers, the drug companies and the trial lawyers is such that effective health reform is to my mind a lot harder than gun control!
I believe a reasonable solution for the payroll tax issue is twofold:
Revenues – broaden the base (do not cap payroll taxes) and lower the rates (with the cap removed the rate could be substantially lowered).
Expenses – make the Social Security and Medicare systems safety nets for the truly needy (more of a welfare system). The government cannot continue to send checks to millions of individuals that are not in need.
On this one, I really disagree. If we consider that high income seniors are doing “too well” raise the income tax on all high income individuals.
If we turn Social Security and Medicare into a means-tested program (it is already partially means-tested with higher premiums for Medicare Part B and some SS subject to income taxation) it will lose all political support (recall what happened to AFDC).
If we recall that it is a system of Social Insurance, the fact that people who “don’t need it” get it anyway is part of the way Social Insurance works — everyone pays in and everyone is entitled to benefit.
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This is why the key to fixing Social Security is to fix how we fund growing families. It also explains why social insurance works – that it is profoundy unfair for families with a large number of kids to get an outsized gain, especially if the parents die young, while someone who has know siblings would support both his or her parents and possible a set of inlaws as sell. Social Security eliminates the undeserved benefits and costs.