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Most retirees believe they’ve earned their Social Security benefits. After all, they have contributed payroll taxes their entire working lives. Research backs up this belief. The lifetime Social Security benefits for a typical retiree in 2010 will roughly match the lifetime contributions made through payroll taxes while working.
The same isn’t true for most of the 45.6 million Americans on Medicare. Experts at the Urban Institute estimate:
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.
If Medicare were self-financing-that is, if seniors on average had prepaid for all the benefits they expect to receive-we would face no fiscal tsunami. In 2009 the average non-institutionalized Medicare beneficiary cost $13,751 of which the individual covered roughly $8,800 and the program paid the remaining 64 percent. As a result of this disparity, the unfunded liabilities for Medicare now total $105 trillion and growing.
“Last year, there were 3.3 workers contributing to Medicare for every person receiving benefits. That ratio is set to fall drastically in the future, dropping to only 2.1 workers per Medicare beneficiary by 2086.” -Christopher J. ConoverLast year, there were 3.3 workers contributing to Medicare for every person receiving benefits. That ratio is set to fall drastically in the future, dropping to only 2.1 workers per Medicare beneficiary by 2086. Simply put, we’ll see increasingly higher costs divided among increasingly fewer people. Imagine we’d already gotten to that ratio today. It would mean that every worker would need to generate on average about $4,200 in wages each year simply to cover current beneficiaries. For workers with employer-based health coverage, that sum would be on top of the $15,745 that workers must pay for family health insurance coverage (or $5,615 for single coverage).
Remember though that the payroll taxes only actually cover one third of the cost (other funding sources such as premium payments, state transfers, general tax revenue, and borrowing cover the rest). If we fully financed Medicare through payroll taxes-as we do for Social Security-this would require each worker to bear a burden averaging $12,600! So for a typical worker with family coverage, more than $28,000 would go each year just to pay for health care. In 2009, the average salary per full-time equivalent worker was less than $52,000. A world in which workers pay more than half their salaries just for health care does not make a whole lot of sense to me. How about you?
Medicare clearly must be reformed. The only issue under debate is how. A fundamental flaw of the Affordable Care Act is that it diverted more than $700 billion dollars out of a badly underfunded program and uses these to bankroll a brand new entitlement. If one imagines these Medicare savings as reducing Medicare’s obligations, Uncle Sam will end up borrowing that same amount to finance the new entitlement created by ACA. So dollar-for-dollar, every penny that Medicare’s unfunded liability is reduced will simply be offset by a new different unfunded liability outside of the program.
Worse, as I’ve explained earlier, the proposed cuts required by ACA are so draconian that we can predict with a high degree of certainty they never will be sustained. After all, doctors have managed to convince Congress for a decade to keep postponing the draconian cuts mandated by a different law enacted under Bill Clinton. Why should we expect the ACA cuts to play out any differently? Moreover, if Congress miraculously does allow these devastating cuts to be implemented, the consequences for seniors will be severe. They will become third-class citizens behind even those on Medicaid in terms of their ability to find providers willing to accept them.
Rather than rely on top-down cuts imposed from Washington, both seniors and taxpayers would be far better served by relying on market forces to create the proper incentives for avoiding unnecessary care, paying too much for individual services, or vastly curtailing the fraud and abuse now rampant in Medicare. The most straightforward way to do that is to make Medicare look more like the Federal Employees Health Benefits (FEHB) Plan that has successfully worked for members of Congress and even the President’s own staff for a half century. A very similar market-based bidding approach has help contribute to the 10-year cost of Medicare Part D being more than 40 percent below original CBO budget projections. This premium support idea has bipartisan backing. It offers far more promise than ACA of actually achieving cost savings without compromising access or quality of care.
The universal nature of Medicare is another flaw that cannot be sustained over the long run. Given the enormous hidden costs of raising every dollar of taxes-roughly 40 cents on the dollar as best I have been able to estimate-it is neither efficient nor fair to transfer payroll taxes from low-paid workers to pay for Warren Buffett’s Medicare benefits. As I’ve explained elsewhere, maintaining the status quo means losing about $150,000 in economic output merely for the privilege of providing lifetime Medicare benefits to Warren Buffett and his wife. Call me thick-headed, but I’m hard-put to see how the communitarian equity gains could possibly be worth an efficiency loss of this magnitude. Especially in an increasingly competitive world, we need to find every opportunity to grow our economy, not shrink it through misguided health policies.
 These figures adjust for inflation and assume that Social Security contributions earned a 2 percent rate of return above and beyond inflation.
 I’ve earlier explained how the Medicare savings is being used to finance a new entitlement rather than save Medicare.
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