Discussion: (0 comments)
There are no comments available.
The public policy blog of the American Enterprise Institute
View related content: Aging
A new Republican talking point in the healthcare debate defends Medicare as an earned right. Seniors, according to this argument, have paid for their Medicare benefits through the taxes, and the president’s plan to cut Medicare to finance expanded health coverage for the uninsured breaches a moral obligation. These cuts have spurred seniors’ opposition to the administration health plans, graphically illustrated at town hall meetings.
Minnesota Republican Rep. Michele Bachmann, appearing on the Fox News Channel, echoed these concerns, putting Medicare cuts in terms of fairness to those who paid for them. Going further, this ad from the conservative 60 Plus Association plays the Greatest Generation card to the hilt, with images of the Great Depression and D-Day telling of the sacrifices seniors made on behalf of the country. Without denying their contributions, let’s put things in perspective.
Let’s start with a typical person who was born in 1944, began work at age 21 in 1965, and in 2009 retired at age 65 and enrolled in Medicare. Over the course of his life he paid the Medicare tax out of his wages (see here for historical tax rates). According to the 2009 Medicare Trustees Report, the average Medicare benefit per person in 2008 was $11,012. From this, we subtract the average Medicare premium of $1,288 to produce an average net benefit of $9,724. I’ll assume that this person collects the average Medicare benefit from age 65 through age 83 (his life expectancy as of age 65).
But unlike Social Security benefits, which increase only to keep up with inflation, Medicare benefits grow in real terms. The Medicare Trustees project that health costs will grow around 1 percentage point faster than the growth of per capita GDP, which in turn they project will grow around 1.3 percent faster than inflation over the next 15 years. So I assume that real Medicare benefits will increase by 2.3 percent each year.
To make taxes and benefits comparable, I convert each to present value terms, assuming a real interest rate of 3 percent. This means that taxes paid in the past have 3 percent interest added each year, to account for the fact that these taxes could otherwise have been invested. Likewise, future benefits have 3 percent annual interest deducted, to account for the fact that retirees must wait to receive them.
So what do we get? This typical person paid around $64,971 in Medicare payroll taxes over his lifetime. Likewise, after netting out Medicare premiums, he’ll receive around $173,886 in lifetime Medicare benefits. The net? He can expect to receive around $108,915 more in benefits than he paid in taxes over his lifetime.
Alternately, let’s put this in terms of return on investment: the typical worker’s Medicare taxes produce an annual compound return of around 6.25 percent above inflation. This is comparable to the return on stocks, without any of the risk. A low-income worker with earnings at half the average wage would receive an 8.45 percent return on his Medicare taxes, while even a high earner at twice the average wage would receive a 4 percent real return—again, without any market risk.
While we can quibble about some of the assumptions and calculations, the scale of Medicare transfers to current beneficiaries is undeniably huge. And since Medicare’s pay-as-you-go financing is zero sum, these transfers, like similar overpayments to early participants in Social Security, will result in future Medicare beneficiaries receiving far less in benefits than they will pay in taxes.
Republicans can and should fight the Democratic health plans with great vigor—they’re, after all, bad policy and, as my friend Keith Hennessey has shown, have been defended by President Obama with a reckless disregard for accuracy. Yet conservatives should be careful not to cement in place the idea that Medicare benefits are sacred because they have been “paid for” by seniors. The typical senior hasn’t come close to paying full freight for his Medicare benefits. While this shouldn’t be used as an excuse to cut benefits without regard to seniors’ needs, we also needn’t buy into rhetoric that will hurt prospects for real reform down the road.
There are no comments available.
1150 17th Street, N.W. Washington, D.C. 20036
© 2014 American Enterprise Institute for Public Policy Research