[The whole subsidy to retiree story is a diversion from the many
important issues facing the country. Even the core idea, that we
don’t adequately support the young because we give too much to the
elderly is wrong. ]
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SOCIAL SECURITY AND MEDICARE: FUN WITH NUMBERS TIME  
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Dean Baker
November 22, 2023
CEPR
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_ The whole subsidy to retiree story is a diversion from the many
important issues facing the country. Even the core idea, that we
don’t adequately support the young because we give too much to the
elderly is wrong. _

,

 

As a Thanksgiving present to readers, Washington Post columnist
Catherine Rampell decided to tell us
[[link removed]] again
how old-timers are robbing from our children with their generous
Social Security and Medicare benefits. This is always a popular theme
at the WaPo, especially around the holiday season.

The story is infuriating for four reasons:

* Even by the calculations highlighted in the piece, Social Security
is not a big subsidy to retirees,
* Medicare appears to be a large subsidy only because our healthcare
system is so inefficient,
* What counts as a government payment, as opposed to a market
outcome, is arbitrary, and
* We pass on a whole society to our children, focusing on these
programs to the neglect of the larger social and physical environment
is close to absurd.

SOCIAL SECURITY

The Social Security program has always been reasonably well-funded,
even as slower growth and the upward redistribution of income over the
last five decades have hurt the program’s finances. It is now
projected to face a shortfall in a bit over a decade, but the gap
between scheduled benefits and taxes is not exceptionally large, as
calculated by Gene Steurele and Karen Smith, Rampell’s source
[[link removed]].

Source: Steurele and Smith, 2023.

The chart below above shows Steurele and Smith’s calculations for
lifetime Social Security benefits and taxes, for people turning 65 in
2025, for men and women at different earnings levels. There are a few
points worth noting on these calculations.

First, they are highly stylized, assuming that a worker puts in 43
years from age 22 to age 65 always earning the same wage relative to
the overall average. This means that their wage rises year by year in
step with inflation and the increase in average wages. No one actually
would follow this pattern.

They are likely to earn less early in their career and more later in
their career. They also are likely to have some years of little or no
earnings. This is especially the case for women who are likely to
spend some time outside of the paid labor force caring for children or
parents. These adjustments would generally lead to higher benefits
relative to taxes.

The second point is that the calculations assume that everyone lives
to age 65 at which point they start to collect benefits. Some people
will die before they can collect benefits, so we are looking at the
benefits for workers who survive to collect benefits. (Social Security
also has survivors’ benefits that go to spouses and minor children
of deceased workers, so their tax payments are not necessarily a
complete loss.)

The third point is that Steurele and Smith have opted to use a 2.0
percent real (inflation-adjusted) interest rate to discount taxes and
benefits. This is a standard rate to use in this sort of analysis, but
one could argue for a higher or lower rate. A higher rate would make
the program seem less generous, while a lower rate would raise
benefits relative to taxes.

As can be seen, low earners are projected to receive more in benefits
than they pay in taxes. An important qualification here is that there
is a large
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growing gap in life expectancies between low and higher earners. These
calculations assume that everyone of the same gender has the same life
expectancy regardless of their income. This means that the benefits
will be somewhat overstated for low earners and understated for high
earners.

Ignoring the life expectancy issue, the chart shows that projected
benefits end up being less than taxes once we get to high earners
($105,800 in 2023). For men projected lifetime taxes exceed benefits
by $106,000. For women the gap is smaller at $49,000, reflecting their
longer life expectancy.

Moving to maximum earners, people who earn the income at which the
payroll tax is capped ($160,200 in 2023), the gaps become larger. In
the case of men, projected lifetime taxes exceed benefits by $319,000.
For women, projected lifetime taxes are $249,000 more than benefits.

There are some simple takeaways we can get from the Steurele and Smith
analysis. First, for low and middle-wage earners Social Security does
indeed pay out more in benefits than workers pay in taxes. However,
the gap is not very large. For average earners, who got $66,100 in
2023, (not shown to keep the size of the graph manageable), the gap is
$3,000 for men and $46,000 for women.

For higher income earners taxes actually exceed benefits. In the case
of maximum earners, these excess payments are actually fairly large,
as noted $319,000 for men and $249,000 for women.

This raises an interesting issue, if we are looking to cut benefits to
reduce the “subsidy” to the elderly provided by Social Security.
We can cut back benefits by a substantial percentage for low earners
to bring their lifetime benefits more closely in line with their
lifetime taxes, but do we really want to reduce retirement benefits
for people who had average earnings of $29,700?

We can make some cuts for more middle-income workers, but someone
earning $66,100 during their working lifetime was not terribly
comfortable, and there is not much subsidy here to start, especially
with men. When we get to higher earners, taxes already exceed
benefits. We can still make cuts to their benefits, but we would not
be taking back a subsidy by this calculation, we would be increasing
their net overpayment to the program.

It’s also worth noting who is a high earner in this story. The high
earner had annual earnings of $105,800 in 2023. President Biden
promised that he would not raise taxes on couples earning less than
$400,000. That puts his cutoff of $200,000 at almost twice the high
earner level, and the calculation of lifetime benefits and taxes turns
negative at a considerably lower income than the stylized high earner.

These calculations show that if we just take Social Security in
isolation and want to reduce the subsidy implied here we either have
to cut benefits for people who are not living comfortably by most
standards, or we have to cut benefits for people who are not currently
receiving a subsidy. We may decide that the latter is good policy, but
we should be clear that it is not taking back a subsidy.

There is an important qualification to this discussion. Married
couples will generally do better in these calculations than single
workers. This is because the spousal benefit allows the spouse to
collect the greater of their own benefit or half of their spouse’s
benefit. Also, a surviving spouse will receive the greater of their
own or their deceased spouse’s benefit. For these reasons, lifetime
benefits for couples will generally be higher relative to taxes than
for single individuals.

THE MEDICARE SUBSIDY AND THE BROKEN HEALTHCARE SYSTEM STORY

The Steurele and Smith analysis shows much larger subsidies for the
Medicare program, as shown below.

There are a few qualifications to these calculations that should be
noted. First, the same caveats about earnings patterns that were noted
with the Social Security calculations also apply to the projected
value of Medicare taxes.

Second, the differences in life expectancies by income matter here
also when assessing the size of the tax penalty or subsidy. The
program is less generous for low earners than shown in this figure and
more generous for high earners.

The third point is that, unlike with the designated Social Security
tax, the Medicare tax is not capped. This means that people earning
above the Social Security cap will be paying more taxes to support the
program. For very high earners ($185,000 for men and $207,000 for
women), projected taxes would exceed benefits. The size of the tax
penalty increases further up the income scale.

Finally, high-income people also pay a designated Medicare tax on
capital income, like dividends and capital gains. For these people, it
is virtually guaranteed that their Medicare taxes exceed their
projected benefits.

With these caveats, we see the same general story as with Social
Security, where there is more of a subsidy for lower earners than
higher earners. While the overall gaps are larger for Medicare,
projected benefits exceed taxes by a larger amount, this changes less
with income than in the case of Social Security.

This is due to the fact that, unlike Social Security, the payout is
not designed to be progressive, with all retirees getting in principle
the same benefit.[1]
[[link removed]] This
is qualified by the fact that higher-income retirees can expect to
receive benefits for a considerably longer period of time, making the
benefit regressive.

I have added a third bar to this graph, labeled “Benefits-Canada.”
This is a calculation of what the cost of benefits would be if we paid
the same amount per person for our healthcare as Canada does. The
Medicare program appears as a huge subsidy to beneficiaries primarily
because we pay so much more for our health care than people in other
wealthy countries.

According to the OECD
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percent more per person than Germany, 107 percent more than France,
and 99 percent more than Canada. This sort of massive gap can be shown
with U.S. costs relative to every other wealthy country. We don’t
get any obvious benefit in terms of better healthcare outcomes from
this additional spending. Life expectancy in the United States is
considerably shorter than in most other wealthy countries.

The “Benefits-Canada” bar allows us to assess the value of
Medicare benefits if our healthcare costs were more in line with those
in other countries. It multiplies the projected value of Medicare
benefits by the ratio of per person health care costs in Canada to
costs in the United States (50.3 percent).

As can be seen, if we calculate Medicare benefits assuming that we pay
as much for our health care as people in Canada, most of the
calculated subsidy goes away. Low earners still receive a substantial
subsidy, $102,000 for men and $122,000 for women, but this quickly
goes away higher up the income ladder.

If we assume Canadian health care costs, a high-earning male has a net
Medicare tax penalty of $21,000, while a high-earning woman has a net
tax penalty of just under $1,000. For those earning at the Social
Security maximum, the net tax penalty for men is $111,000, and for
women it’s $91,000.

The implication of this calculation is that the seemingly large
subsidies that Medicare provides to retirees is not due to the
generosity of benefits, it is due to the fact that we overpay for our
healthcare. Medicare is not providing a large subsidy to retirees, it
is providing a large subsidy for drug companies, medical equipment
suppliers, insurers, and doctors
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(In case you are wondering, people in the U.S. are not generally paid
much more than people in other wealthy countries. Our manufacturing
workers get considerably lower pay
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We pay roughly twice as much in all of these categories as people in
other wealthy countries. It is misleading to imply that these
overpayments are generous to retirees. While all of these interest
groups have powerful lobbies, which makes it politically difficult to
bring their compensation in line with other wealthy countries, we
should at least be honest about who is getting subsidized by the high
cost of our Medicare program.

WHAT DO SUBSIDIES MEAN, WHEN THE GOVERNMENT STRUCTURES THE MARKET?

There is another aspect of these calculations that should have jumped
out at people when I noted that the designated Medicare tax is not
capped and also applies to capital income. The taxes that are
designated for these programs are arbitrary. We can designate other
taxes that people pay as being Social Security and Medicare taxes, and
apparent subsidies will disappear.

In fact, the idea that we can make a clear distinction between income
that people have somehow earned, and income that is given to them by
the government, is in fact an illusion. The government structures the
markets in ways that allow some people to get very wealthy and keep
others on the edge of subsistence.

Those who make big bucks in the healthcare industry are just one
example. While our trade policy was quite explicitly designed to open
the door to cheap manufactured goods, we actually have increased the
barriers that make it difficult for foreign-trained doctors to
practice in the United States.

We have made patent and copyright monopolies longer and stronger. The
government subsidizes bio-medical research and then gives private
companies monopoly control over the product. In a recent example, we
paid Moderna to develop a COVID vaccine and then gave them control
over it, creating at least five
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billionaires.  

We have allowed our financial sector to become incredibly bloated,
creating many millionaires and billionaires, even as we demand
efficiency elsewhere. We give Elon Musk and Mark Zuckerberg Section
230 protection
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defamation suits that their counterparts in print and broadcast media
do not enjoy.

And, as was recently highlighted with the UAW strike, our CEOs make
far more than the CEOS of comparably sized companies in other wealthy
countries. The difference
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as much as a factor of ten in the case of Japanese companies. This is
not due to the natural workings of the market, this is the result of a
corrupt corporate governance structure that allows the CEOs to have
their friends set their pay.

Yes, I am again talking about my book
[[link removed]] (it’s free). It is absurd
to obsess about tax and transfer policy while ignoring the ways in
which the government structures the market to determine winners and
losers. It is understandable that the right would like tax and
transfer policy to be the focus of public debate, since the default is
a market outcome that leaves most money with the rich.

However, it is beyond absurd that people who consider themselves
progressive would accept this framing. We can structure
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market differently to get more equitable market outcomes. This should
be front and center in public debate. Unfortunately, the right wants
to hide the fact that we can structure the market differently, and
progressives are all too willing to go along.  

FUTURE OF THE PLANET

There is a final point on the sort of generational scorecard implied
by these calculations of Social Security and Medicare benefits. We
don’t just hand our children a tax bill, we hand them an entire
economy, society, and planet.

If we experience anything resembling normal economic growth, average
wages will be far higher twenty or thirty years from now than they are
today. Will the typical worker see these wage gains? That will depend
on distribution within generations, not between generations.

We also see costs from items like the military. When I was growing up
in the 1960s we paid a much larger share of our GDP to support the
Cold War. (Young men were also drafted.) We will again pay lots more
money for the military if we have a new Cold War with China
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don’t figure into the Social Security and Medicare calculations, but
will be every bit as much of a drain on the income of people in the
future as taxes for these programs.

And, we should always have global warming front and center. If we paid
off the national debt and eliminated the programs to support retirees,
but did nothing to restrain global warming, our children and
grandchildren would not have much reason to thank us. First and
foremost, we must give them a livable planet.

PHONY ANSWERS TO A PHONY QUESTION

The whole subsidy to retiree story is a diversion from the many
important issues facing the country. Even the core idea, that we
don’t adequately support the young because we give too much to the
elderly is wrong.

We saw this very clearly in the debate over the extension of the child
tax credit. As with everything in Congress, much is determined by
narrow political considerations. Republicans had no interest in giving
President Biden and the Democrats a win, but the bill could have
passed without Republican votes.

The deciding factor was the refusal of West Virginia Senator Joe
Manchin to support the bill. Senator Manchin was very clear on his
concerns. He didn’t argue that we were spending too much on
retirees, he didn’t want low-income people to have the money.

This is in general the story as to why we don’t have adequate
funding for early childhood education, children’s nutrition, day
care and other programs that would benefit children. There is a
substantial political bloc that does not want to fund these programs.
And, they still would not want to fund these programs even if we
didn’t pay a dime for Social Security and Medicare.

[1]
[[link removed]] This
is not strictly true, since the premium payment that retirees make for
Part B and Part D of the Medicare program depends on income in
retirement.

_Dean Baker co-founded CEPR in 1999. His areas of research include
housing and macroeconomics, intellectual property, Social Security,
Medicare and European labor markets. He is the author of several
books, including Rigged: How Globalization and the Rules of the
Modern Economy Were Structured to Make the Rich Richer
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commentary on economic reporting. He received his B.A. from Swarthmore
College and his Ph.D. in Economics from the University of Michigan._

_The Center for Economic and Policy Research (CEPR) was established in
1999 to promote democratic debate on the most important economic and
social issues that affect people’s lives. In order for citizens to
effectively exercise their voices in a democracy, they should be
informed about the problems and choices that they face. CEPR is
committed to presenting issues in an accurate and understandable
manner, so that the public is better prepared to choose among the
various policy options._

_CEPR was co-founded by economists Dean Baker
[[link removed]] and Mark Weisbrot
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economists ROBERT SOLOW and JOSEPH STIGLITZ; JANET GORNICK,
Professor at the CUNY Graduate School and Director of the Luxembourg
Income Study; and RICHARD FREEMAN, Professor of Economics at Harvard
University._

* Social Security
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* Medicare
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* Child Tax Credit
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* Climate Change
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