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Why is medicare going broke

why is medicare going broke

Why Social Security and Medicare Are Going Broke: By the Numbers

Social Security and Medicare are going broke, primarily because of the way the system is structured. In a normal—and therefore actuarily sound—retirement account, benefits are dependent on contributions, plus interest or earnings.

Not so in Social Security and Medicare; they are considered “social insurance,” and both the contributions and benefits are capricious, arbitrary and … political.

As Eugene Steuerle and Stephanie Rennane of the Urban Institute demonstrate:

A single male who makes the average wage his entire working life until retiring at age 65 in 2011 will have paid into Social Security $299,000—which includes the government (allegedly) paying a 2 percent interest rate. He can expect to receive about $266,000 if he lives the roughly 15 additional years the actuaries say he will after turning 65.

A bad deal, right? Not so fast. That same man is expected to have paid $60,000 in Medicare payroll taxes, while receiving $170,000

in health benefits.

So while the average single man loses $33,000 in Social Security, he gains $110,000 in health care benefits.

A one-earner couple with the same average wage makes out like bandits. He will have paid in the same amount—$299,000+$60,000 = $359,000—but the couple can expect to receive $448,000 in lifetime Social Security benefits and $357,000 in Medicare, for a total of $805,000 in benefits.

By contrast, the two-earner family making the average wage gets more back in benefits, $913,000, but also pays a lot more than the one-earner family in Social Security and Medicare taxes, $717,000. You might call it the entitlement programs’ “working penalty.”

Unlike a system where workers had their own personal Social Security and Medicare accounts—supplemented by the government if they didn’t make enough—the current system bears little resemblance actual contributions, so no one should be surprised if it’s going broke—fast.


Today's TaxByte was written by IPI Resident Scholar Dr. Merrill Matthews.

Category: Insurance

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