October 1, 2014

With Medicare, You Get Substantially More Than You Pay For

Urban Institute scholar Gene Steuerle has run the numbers and found that for Medicare, retirees are getting a really good deal.

In a fascinating set of calculations, Steuerle and colleague Stephanie Rennane, looked at both Social Security and Medicare and estimated the levels of benefits relative to taxes (and premiums for Medicare) paid for many different levels of income and years of retirement.

For Social Security, prior generations received substantially more benefits than taxes paid, while current retirees and those in the future who earn average and above-average wages are scheduled to receive slightly less cash benefits than taxes paid. The lowest income workers are scheduled to still get more in benefits than taxes paid. 

For Medicare, however, their conclusion is that, "Past and current retirees, and most working age adults, will never pay for all of their benefits."

The basic reason is that Medicare payroll taxes, which only go towards Medicare Part A (hospital insurance), combined with premiums (which are set at levels to pay for about 25 percent of Medicare Part B costs), only cover 51 to 58 percent of total Medicare expenditures over time. The remaining Medicare expenditures are paid for out of the general revenue pool or by Treasury borrowing, like almost all other spending programs of the federal budget. 

This distinguishes Medicare from any other private health insurance, or any other insurance policy where the insurer wants to stay in business. With those products, actuaries determine the expected costs to insure the population and then the insurer sets premiums at levels where they can at worst break even and, at best, make a profit. In the case of Medicare, contrary to popular belief, we have not done that. Premiums were never designed to cover all costs, and as health care inflation makes benefits more generous while demographics leave fewer taxpayers relative to beneficiaries, dedicated taxes are not set at levels high enough to cover costs.

For an average couple who retired in 2010, with each spouse earning an average wage of $43,100, they will have paid about $109,000 in Medicare taxes over their lifetimes, while getting lifetime Medicare benefits of $343,000 net of premiums. A similar earning couple retiring in 2030 will pay about $167,000 while getting $530,000 in benefits (all numbers in 2010 dollars).

Perhaps the most shocking thing is that the 2030s couple will get an expected Medicare benefit over four times as generous as a couple received after retiring in 1980. One of the primary reasons behind that explosion of generosity? Medicare provides an unlimited benefit to nearly any form of health care intervention, regardless of cost, at whatever frequency recommended by health care providers who earn more, the more they do.

Hopefully, some of the trial programs put in place by health care reform will succeed in reforming this system and then Congress will have the political will to allow the successful programs to broadly curb Medicare's cost explosion. Yet, even more important will be for Congress and the President to reform the entire trajectory of the federal budget by deciding which benefits American's should receive from the government, and then finding a way for us to pay for them. Future generations are counting on our ability to make this quite reasonable trade-off.