In his interview with 60 Minutes that aired Sunday night, Speaker of the House Paul Ryan made a compelling case for reforming Medicare. But in trying to make a political point about the need to maintain the status quo for beneficiaries in retirement, Speaker Ryan actually understated the problems the program faces:
We have to make sure that we shore this program up. And the reforms that we’ve been talking about don’t change the benefit for anybody who is in or near retirement. My mom’s now enjoying Medicare. She’s already retired. She earned it. But for those of us, you know, the X-Generation on down, it won’t be there for us on its current path. So we have to bring reform to this program for the younger generation, so that it’s there for us when we retire, and so that we can keep cash flowing to current generations’ commitments. And the more we kick the can down the road, the more we delay, the worse it gets.
There’s just one problem with this explanation: the benefits Ryan claimed his mother’s generation “earned” don’t begin to match the money paid into the system.
Money In Doesn’t Equal Money Out
Strictly speaking, the benefits Ryan’s mother receive are “earned,” in the sense that beneficiaries must pay into the Social Security system for 40 quarters to qualify for Medicare eligibility. But in the actuarial sense of “earned” benefits—“I’m only getting back all the money I paid in during my working life”—most beneficiaries receive benefits that vastly exceed their payroll tax contributions to Medicare.
In its 2015 document highlighting the long-term budget outlook, the Congressional Budget Office (CBO) conducted an analysis of average payroll taxes paid and benefits received. It found the latter exceeded the former by a wide margin—a margin that will grow over time:
Under the assumption that all scheduled benefits are paid, real average lifetime benefits (net of premiums paid) for each birth cohort as a percentage of lifetime savings will generally be greater than those for the preceding cohort. For example, benefits received over a lifetime are projected to equal about 7 percent of lifetime earnings for people born in the 1940s, on average, but 11 percent for people born in the 1960s. By contrast, real average lifetime payroll taxes relative to lifetime earnings will rise from 2 percent in the 1940s cohort to almost 3 percent for the 1960s cohort.
Both the text and accompanying chart come with a significant caveat: Medicare payroll taxes fund only a share of overall Medicare spending, and that share has declined significantly in recent years—from 67 percent in 2000 to about 40 percent last year. General revenue covers a growing (currently about 47 percent) percentage of Medicare’s finances; individuals do pay a portion of the federal government’s general revenue through income taxes, but it’s harder to differentiate what portion of an individual’s income taxes fund Medicare in any given year.
Regardless, the CBO analysis confirms that benefits paid out continue to rise thanks to skyrocketing health costs—and that taxes paid into the system cannot keep up. A similar CBO analysis conducted earlier this year for the 2016 long-term budget outlook likewise determined that Social Security benefits paid out will exceed taxes taken in for most seniors. (Unlike Medicare, Social Security is funded entirely by payroll taxes, so the gap between benefits and taxes is smaller, but still significant.) Both CBO reports echo research undertaken by the Urban Institute, whose most recent analysis found that a couple earning average wages who retired last year will receive $1,038,000 in Medicare and Social Security benefits after paying in only $683,000 in payroll taxes.
We Have To Fix Our Medicare System
Phasing in changes like premium support for Medicare makes both political and policy sense—to give Americans time to adjust and plan for major changes to entitlement programs, and to try and head off campaigns designed to scare current seniors. On the other hand, CBO believes the premium support proposal included in House Republicans’ budget this year would save seniors 6 percent on out-of-pocket health costs annually—raising the obvious question of why seniors should be shut out of the opportunity to save money.
No matter the details, the fact that most seniors receive more in benefits than they paid in payroll taxes speaks to the urgent need to right-size our entitlements. Regardless of how we do it, our nation will be much better off if we confront these problems sooner rather than later. Because continuing our Lake Wobegon system—in which everyone receives more than they paid in—will guarantee a fiscal crisis of epic proportions.
This post was originally published at The Federalist.