ANALYSIS

Are Americans getting $3 in Medicare benefits for every $1 in taxes?

Posted March 20, 2013, at 11:49 a.m.

“We need to accomplish the big jobs now of making sure that Medicare and Social Security are there, not just for people today, but for the next generation. You know, people have paid into these programs, and for every $1, people have paid in, they’re getting about $3 out in benefits in terms of Medicare.”

- Sen. John Barrasso, R-Wyo., speaking on CNN, March 14, 2013

Back when I covered politics, “person in the street” interviews generally yielded a similar answer when people were asked about the government — and whether they got much in benefits for the taxes they pay. The common response: It’s a raw deal for me.

So we were struck by Barrasso’s comment. Are folks really getting $3 in benefits for every $1 in taxes they have paid? And is this really the right way to look at this statistic?

Barrasso spokeswoman Emily Lawrimore said that Barrasso obtained this statistic from a report published by the nonpartisan Urban Institute, written by C. Eugene Steuerle and Caleb Quakenbush. The report tracked Social Security and Medicare taxes and benefits over a lifetime, for a variety of scenarios.

Looking specifically at the Medicare numbers, Barrasso’s ratio of 1:3 generally holds up. A single man with an average wage of $44,600 who turns 65 in 2030, for instance, would pay $90,000 in lifetime Medicare taxes and receive $311,000 in Medicare benefits. Good deal!

The numbers are even better for a two-earner couple, if one spouse earns relatively low wages. They pay $131,000 in taxes — and receive $664,000 in benefits.

But the numbers also include Social Security taxes. The combined numbers still show people coming out ahead, but the ratio is not nearly as generous. That single male who turns 65 in 2030? He actually pays slightly more in Social Security taxes than he gets in benefits, so, combined, he pays $494,000 in taxes and receives $650,000 in total benefits.

(Note: The old-age program is not just a retirement benefit but also a disability and life insurance program, so one can’t really speak of a “return” on investments.)

We checked with Steuerle — a well-respected expert on taxes, budgets and retirement systems — and asked whether Barrasso was using his data correctly.

Steuerle said that he was not trying to single out Medicare, but was trying to focus on both Social Security and Medicare. “I think we would probably engage in a better reform if we tried to reform both systems at the same time,” he said in an email.

“The complication is that these systems are essentially transfer systems: money in, money out,” he added. “A small temporary build-up of trust funds doesn’t really change that calculus. I do the calculations on lifetime benefits and taxes mainly so we can try to determine if this is the best or fairest way to engage in such transfers within and across generations. How can we judge unless we know that basic facts?”

In that vein, one could also quibble with Barrasso’s use of the phrase “paid in,” because as Steuerle suggests, it is not as if people have actually invested in the programs; they are simply paying the bills for current retirees.

“In truth, we already got our ‘money’s worth’ in terms of the benefits we provided for our parents,” he said. “That doesn’t necessarily entitle us to some amount from our kids, particularly if there are a lot fewer of them around per recipient.”

In fact, the “money-in, money-out” aspect of Social Security and Medicare means the so-called returns are only going to get worse over time. Right now, some of the shortfall is being made up with transfers from general revenues — which crowds out the possibility of using those government funds (also from taxes) for other activities, such as investments in infrastructure.

“There are continually declining returns in these systems because they start out with windfalls for the first generations, then higher taxes on later generations,” Steuerle said. “Social Security has reached this point of maturity. Medicare has not, in no small part because these huge health benefit growth rates continually mean higher taxes (or deficits) on the younger generations to pay for them.”

Barrasso did preface his reference to this statistic by mentioning both Social Security and Medicare, though it might have been better to note that the so-called returns have been declining for Social Security. As we said, we might also quibble with the phrase “paid in,” since that suggests some sort of investment.

But, overall, Barrasso got the numbers right and helped call attention to the fact that, at the moment, Medicare is a pretty good bargain for people — a bargain that likely cannot be sustained.

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