Have seniors really paid for Medicare and Social Security?

February 18, 2013

"So essentially, you are in favor of genocide of seniors," wrote one reader in response to my column on the best reason to worry about the deficit. "I was correct in my assessment of you."

I don't want to hurt you, grandpa! (Washington Post)
I don't want to hurt you, grandpa! (Washington Post)

The column, which you can read here, is about the way that the old anxieties about federal deficits crowding out private borrowing don't apply to our current economic situation. Rather, the more serious concern is that trends in government spending and taxation will "squeeze-out" important government programs and investments that are core to our economic future. Or, put more directly, that Social Security, Medicare and low taxes will end up squeezing out education, infrastructure and research.

To be fair, most of the e-mails I got, even the angry ones, did not actually accuse me of elder-genocide sympathies. But they almost all made the same point. Seniors have paid for their benefits. They deserve them. A few comments on this:

- Few seniors have actually paid for their Medicare benefits. According to an Urban Institute estimate, the typical retired couple paid $122,000 in lifetime Medicare taxes but can expect to receive benefits worth $387,000. Social Security is another story. There, the average retired couple paid $600,000 in lifetime taxes for $579,000 in benefits. Put together, it's $722,000 in taxes for $966,000 in benefits. (All figures are adjusted for inflation.)

The trust funds are, by and large, okay for a few more years, but going forward, both programs are taking in much less than they're scheduled to be paying out, particularly if health-care costs don't slow in a permanent way.

- There's nothing unusual about Social Security and Medicare in this respect. We all pay into most everything the government does, and we're all paying less than we're ultimately receiving. That's why there's a large and persistent deficit.

- The problem in retirement, as elsewhere, is really health-care costs. Social Security's rising spending is both manageable and, given the state of private retirement savings, desirable. If it were up to me, I'd increase the Social Security benefit for most seniors (though I'd also do more means-testing and raise the payroll tax cap). But the real expense is coming from Medicare, where costs have been rising quickly -- though less so lately -- without delivering much in extra value.

- The other problem is that we have very different budgeting processes for Medicare, Medicaid and Social Security than we have for most everything else in the federal government. Spending for those programs is automatic (or, in budget parlance, "mandatory"), and the levels are based on what the programs need to deliver their promised benefits. Spending on, say, education, or infrastructure, is "discretionary," and Congress revisits such spending every single year, and often more than once in a year.

- That's the basic mechanism for what I call government "squeeze-out": Medicare, Medicaid and Social Security, all of which are growing quickly due to trends in health-care spending and/or the aging of the population, basically grow automatically and Congress looks to make the numbers work by going after the other parts of the budget, where they have an easier time making changes.

- A related problem is that Congress tends to cut "discretionary spending" by simply capping how much can be spent on it in the future. That way, the cuts are mystery cuts that don't affect any programs or upset any constituencies right now. Cutting Social Security doesn't work like that. So that's another reason Congress likes to cut deep into discretionary spending rather than touching mandatory spending.

- Further, as the society ages, and health-care costs continue to rise (even if we're successful in our cost control efforts and they rise more slowly), taxes will need to go up and by much more than they did in the fiscal cliff deal.

- The strange budget detente in which both sides now seem to accept the sequester will go into affect, at least for awhile, makes all this much worse. The point of the sequester is it cuts so deep into discretionary that Congress would never permit it to happen. But now, because Republicans won't agree to higher taxes and Democrats won't cut entitlements unless Republicans agree to higher taxes, it might actually happen. This is leading to a lot more squeeze-out than anyone would've predicted, say, two years ago.

- The point here isn't that seniors don't deserve their benefits, or have done something wrong. It's that the structure and politics of the federal budget right now are leading to a situation in which spending on retirees and keeping taxes low on current workers could really shortchange needed investments in our future. And, while I don't want to fall into the trap of pretending that government exists to pay out future Social Security benefits, if future growth is low, it's very difficult to imagine promises to current workers being kept.

- Related to that point, I wonder sometimes about a future for the budget in which we get very good at figuring out which health-care spending delivers value but we don't get much better at cost control. It's an easy enough future to imagine: Perhaps the coming rush of comparative-effectiveness research shows that some very expensive treatments should be used much more widely. Add in a couple of very effective, very expensive new treatments or drugs, and you're there.

That's a future in which taxes need to be much higher but health-care spending doesn't need to be much lower. As a general point, the real problem with health-care spending isn't how much we're spending but how little we're getting. If sticking on our current budget trajectory could make us live twice as long, there'd be a very good argument for simply doing that.

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Brad Plumer | February 18, 2013