Can we all come out ahead?

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Most of us who have held jobs at one time or another have contributed to both Social Security and Medicare out of every paycheck. So let me ask you a question.

Do you think of Social Security and Medicare as an “investment,” like stocks or bonds in your portfolio? That is, do you consider yourself to have invested a percentage of your paycheck, throughout your working life, in the expectation that the government will pay that money back to you — plus interest — over the course of your retirement?

Not long ago, I spoke to a group of well-educated and sophisticated older adults and the subject came up. A number of them seemed to feel that they had probably paid in “two or three times as much” in Social Security taxes as they would likely receive in benefits.

They also weren’t too happy about their rising Medicare premiums and the cost of supplemental Medigap insurance. They seemed to feel they were getting the short end of the stick. 

So I was intrigued to see a study released in January by the Urban Institute, a nonpartisan think tank in Washington, D.C., that estimates how much typical workers will pay into, and get out of, Social Security and Medicare during their lifetimes. 

The economists who prepared the estimates ran the numbers for single male and female workers as well as for one-earner and two-earner couples, all earning the average wage.

They also ran the numbers for four different generations —those retiring in 1960, 1980, 2010 and 2030 — to get a picture of how costs and benefits changed over time.

They then adjusted all the numbers to present dollars (so they could be reasonably compared), netted them of Medicare premiums paid, and — this is interesting — calculated the total of all contributions as if they were invested each year at an interest rate of inflation plus 2 percent.

The results (based on these and other assumptions that, of course, are merely an approximation of reality) tell us:

a. how much money the average worker would have if he or she had been able to keep all their payroll taxes and invest them, and

b. how much money it would take, invested in an interest-bearing account, to produce the Social Security and Medicare benefits they will actually receive over the rest of their lives. 

 

I was amazed to see that — in every single case — workers came out receiving more in benefits than they paid in taxes, often several times more, and even with the assumed interest earnings.

Of course, you might have expected that result for people retiring back in 1960, since Medicare didn’t even begin until 1965. In most cases, those lucky enough to have retired in that year received from 7 to 14 times as much in benefits as they paid in taxes.

Those retiring in 1980 were not quite as fortunate, but still to be envied. They received from 2 to 5 times as much in benefits as they paid in.

Folks retiring in 2010 or 2030 all came out with anywhere from 1.25 to 2.25 times as much.

It reminds me of the old joke about the businessman who lost money on every sale “but made it up on volume.” It makes you wonder how the system has survived as long as it has.

I assume part of the explanation is that Social Security is purposely set up to return more to low- and average-income workers than to high-income earners. Presumably, the additional taxes collected from those in higher brackets make up the difference to keep the programs self-sustaining.

But there are a number of factors at present that raise the prospect of growing problems in the future. Among them are declining payroll tax collections (due to the recession), a shrinking workforce, a ballooning federal deficit, ever-lengthening life expectancies, and the pending retirement of 68 million baby boomers, which will nearly double the number of beneficiaries in the programs.

In a recent national survey, 54 percent of Americans said they didn’t think spending on Medicare would need to be cut to balance the federal budget. And 59 percent felt the same way about Social Security.

The survey suggests that most Americans aren’t buying the argument that these national entitlement programs — which even before the retirement of the boomers account for about a third of all government spending — need to be reined in to insure their long-term survival.

I have a feeling they have another think coming.