Medicare, Social Security Are Bargains for Beneficiaries

Many people pay hundreds of thousands dollars less in payroll taxes than they receive in benefits.

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

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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.

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Eugene Steuerle, a fellow at the Urban Institute in Washington, publishes widely cited research that Social Security and, particularly, Medicare, are bargains for beneficiaries. The Urban Institute, a public policy research nonprofit, updates the numbers annually.

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 $574 billion on Medicare. Nearly $267 billion was spent on Medicare's hospital insurance program (Part A of Medicare). This is the part that has its own dedicated trust fund, which paid all of these expenses but is slowly depleting its reserves.

The other $307 billion was spent on doctor and other covered outpatient services (Part B) and prescription drugs (Part D). While these programs do collect insurance premiums, their revenues cover only 30 percent of their expenses. The other 70 percent – roughly $215 billion – comes straight from general federal revenues.

Totaling up lifetime benefits makes it dramatically clear how big the programs are, even for middle-income families. Receiving $25,000 a year in Social Security and Medicare benefits amounts to half a million dollars for an individual older than 20 years and $1 million for a couple each receiving that much.

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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 ($110,100 in 2012 when the calculations were done and $113,700 in 2013).

Here are six scenarios from the Urban Institute for people who turned 65 in 2010 and chose to begin both Social Security and Medicare benefits. All the figures are expressed in 2012 dollars. This means, among other things, that although benefits will be paid in the future and payroll taxes have already been paid, the comparison between lifetime benefits and taxes is still an apples-to-apples measurement and is not skewed by the effects of inflation.

1. Single man earning $44,600 a year (the projected average wage level in 2012): He would come out $96,000 ahead over his lifetime, receiving $457,000 in Social Security and Medicare benefits and paying out $361,000 in taxes for the two programs. On Social Security alone, he would "lose" $23,000, receiving $277,000 in benefits but paying $300,000 in Social Security taxes. For Medicare, he would enjoy a net gain of $119,000, receiving $180,000 in lifetime benefits and paying only $61,000 in Medicare taxes.

2. Single woman earning $44,600 a year: She would come out $148,000 ahead over her lifetime, receiving $509,000 in Social Security and Medicare benefits and paying out $361,000 in taxes for the two programs. On Social Security alone, she would gain $2,000, receiving $302,000 in benefits and paying $300,000 in Social Security taxes. For Medicare, she would enjoy a net gain of $146,000, receiving $207,000 in lifetime benefits and paying only $60,100 in Medicare taxes.

3. One-earner couple earning $44,600 a year: They would come out a whopping $493,000 ahead over their lifetimes, receiving $854,000 in Social Security and Medicare benefits and paying out $361,000 in taxes for the two programs. On Social Security alone, they would enjoy a $167,000 surplus, receiving $467,000 in benefits while paying $300,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $326,000, receiving $387,000 in lifetime benefits and paying only $61,000 in Medicare taxes.

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4. Two-earner couple, with one spouse earning $44,600 a year and the second earning $20,000 (the projected low wage in 2012): They would come out $354,000 ahead over their lifetimes, receiving $877,000 in Social Security and Medicare benefits and paying out $523,000 in taxes for the two programs. On Social Security alone, they would enjoy a $55,000 surplus, receiving $490,000 in benefits while paying $435,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $299,000, receiving $387,000 in lifetime benefits and paying only $99,000 in Medicare taxes.

5. Two-earner couple, with both spouses earning $44,600 a year: They would come out $244,000 ahead over their lifetimes, receiving $966,000 in Social Security and Medicare benefits and paying out $722,000 in taxes for the two programs. On Social Security alone, they would lose $21,000, receiving $579,000 in benefits but paying $600,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $265,000, receiving $387,000 in lifetime benefits and paying only $122,000 in Medicare taxes.

6. Two-earner couple, with one spouse earning $71,400 a year (the projected high wage in 2012) and the second earning $44.600: They would come out $159,000 ahead over their lifetimes, receiving $1,080,000 in Social Security and Medicare benefits and paying out $921,000 in taxes for the two programs. On Social Security alone, they would lose $72,000, receiving $693,000 in benefits but paying $765,000 in Social Security taxes. For Medicare, they would enjoy a net gain of $231,000, receiving $387,000 in lifetime benefits and paying $156,000 in Medicare taxes.