Seniors Don't Pay Full Medicare, Social Security Share

In the current debates over cuts to federal spending, seniors' organizations overwhelmingly argue against cuts to Medicare or Social Security. Public opinion polls also find big majorities against cuts. Perhaps the most often-used defense of the programs is that they provide benefits that people have paid for through payroll taxes and Medicare insurance premiums. "You paid for it—you earned it," is a common rallying cry.

In reality, however, that statement is far from accurate. Consumer payments that flow to Social Security and Medicare fall well short of paying for the programs' benefits, and the gap is getting wider each year.

[See 10 Steps to Fine-Tune Your Retirement Plan.]

Eugene Steuerle, a fellow at the Urban Institute in Washington, published widely cited research early this year that Social Security and, particularly, Medicare, are bargains for beneficiaries. The Institute, a public policy research nonprofit, has just updated the numbers to reflect current assessments of the programs contained in the recent 2011 Social Security and Medicare trustees' reports. The programs' worsening financial conditions represent even larger bargains to seniors than Steuerle's earlier projections.

Social Security comes much closer to paying for itself, but lower-income workers and couples with only one working spouse come out way ahead in terms of benefits they receive versus the taxes they (and their employers) pay to support the program. High-income earners often pay more in taxes than they receive in benefits over their expected lifetimes.

Medicare pays far more in benefits than it receives in tax payments, even for many affluent beneficiaries. Last year, the government spent $237 billion more for Medicare than it received from all payroll taxes and insurance premiums that consumers pay for their Medicare benefits.

Steuerle said in an interview that he hopes his numbers help trigger new ways of looking at old-age benefits. Toting up lifetime benefits makes it dramatically clear how big the programs are, even for middle-income families. "You take $25,000 a year in Social Security and Medicare benefits, pay them for 20 years, and you've spent half a million dollars. Take a married couple, and now it's doubled to a million dollars," he said.

"If you're thinking about reforming the system, they cause you to think about it in a different manner," he said. "What's the package of benefits you want, and can we afford them in the future for our elderly?" Viewing the programs together, along with Medicaid in some cases, might produce a less expensive and more responsive approach to a person's lifetime security needs. For example, Steuerle said, someone might elect a higher Social Security cash benefit by agreeing to a Medicare package that costs the government less money.

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Here are seven scenarios for people who turn 65 in 2011 and choose to begin both Social Security and Medicare benefits. Every year, Social Security calculates average wages for typical workers. The calculations assume that for every year of their working lives, people have received either that year's average wage, a low wage (45 percent of average), a high wage (160 percent of average), or the maximum wage subject to Social Security taxes (now $106,800).

1. Single man earning $43,500 a year (the projected average wage level in 2011): He would come out $77,000 ahead over his lifetime, receiving $436,000 in Social Security and Medicare benefits and paying out $359,000 in taxes for the two programs. On Social Security alone, he would "lose" $33,000, receiving $266,000 in benefits but paying $299,000 in Social Security taxes. For Medicare, he would enjoy a net gain of $110,000, receiving $170,000 in lifetime benefits and paying only $60,000 in Medicare taxes.

2. Single woman earning $43,500 a year: She would come out $119,000 ahead over her lifetime, receiving $478,000 in Social Security and Medicare benefits and paying out $359,000 in taxes for the two programs. On Social Security alone, she would lose $9,000, receiving $290,000 in benefits but paying $299,000 in Social Security taxes. For Medicare, she would enjoy a net gain of $128,000, receiving $188,000 in lifetime benefits and paying only $60,000 in Medicare taxes.

3. One-earner couple earning $43,500 a year: They would come out $446,000 ahead over their lifetimes, receiving $805,000 in Social Security and Medicare benefits and paying out $359,000 in taxes for the two programs. On Social Security alone, they would enjoy a $149,000 surplus, receiving $448,000 in benefits while paying $299,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $297,000, receiving $357,000 in lifetime benefits and paying only $60,000 in Medicare taxes.

[See Older Populations Soar as Age Trend Accelerates.]

4. Two-earner couple, with one spouse earning $43,500 a year and the second earning $19,500 (the projected low wage in 2011): They would come out $308,000 ahead over their lifetimes, receiving $828,000 in Social Security and Medicare benefits and paying out $520,000 in taxes for the two programs. On Social Security alone, they would enjoy a $37,000 surplus, receiving $471,000 in benefits while paying $434,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $271,000, receiving $357,000 in lifetime benefits and paying only $86,000 in Medicare taxes.

5. Two-earner couple, with both spouses earning $43,500 a year: They would come out $196,000 ahead over their lifetimes, receiving $913,000 in Social Security and Medicare benefits and paying out $717,000 in taxes for the two programs. On Social Security alone, they would lose $42,000, receiving $556,000 in benefits but paying $598,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $238,000, receiving $357,000 in lifetime benefits and paying only $119,000 in Medicare taxes.

6. Two-earner couple, with one spouse earning $69,600 a year (the projected high wage in 2011) and the second earning $43,500: They would come out $103,000 ahead over their lifetimes, receiving $1,023,000 in Social Security and Medicare benefits and paying out $920,000 in taxes for the two programs. On Social Security alone, they would lose $100,000, receiving $666,000 in benefits but paying $766,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $203,000, receiving $357,000 in lifetime benefits and paying $154,000 in Medicare taxes.

7. Two-earner couple, with one spouse earning $106,800 a year (the maximum taxable wage base in 2011) and the second earning $69,600: They would come out $62,000 behind over their lifetimes, receiving $1,106,000 in Social Security and Medicare benefits but paying out $1,168,000 in taxes for the two programs. On Social Security alone, they would lose $194,000, receiving $749,000 in benefits but paying $943,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $132,000, receiving $357,000 in lifetime benefits and paying $225,000 in Medicare taxes.

Twitter: @PhilMoeller