Second, every working American has Medicare taxes deducted from each paycheck and has been told that the money is paid into a trust fund for his or her future benefits. It’s not surprising that Americans feel proprietary about Medicare — they believe that they have spent their working lives paying for their future benefits.
But those Medicare taxes, and interest on the program’s small trust fund, cover just 38 percent of the annual cost of the program’s benefits. Premiums paid by beneficiaries cover an additional 12 percent, but fully half of the program’s $549 billion cost last year was funded by federal income taxes on working Americans.
Put another way, Medicare is a transfer of wealth from younger to older Americans.
As long as the baby boomers were working and paying taxes, their large numbers made this transfer to their parents and grandparents affordable. But the boomers began to retire last year. In its 2011 annual report on the nation’s financial position — compiled in conjunction with the Office of Management and Budget — the U.S. Treasury described the federal government’s finances as unsustainable. Treasury Secretary Timothy Geithner, in testimony to Congress this year, cited the ballooning cost of the transfer inherent in Medicare as a key driver.
The net present value of the transfer — the amount that would have to be set aside today to fund Medicare’s future intergenerational promises — has grown to at least $25 trillion, as calculated by the Government Accountability Office. This number is buried in footnotes of the annual Treasury-OMB report and is so large (almost twice the $14 trillion value of all public U.S. companies) that it defies comprehension. It’s not surprising that Americans can’t relate the alarming cost of this transfer to their own lives.
But recent work by the Urban Institute calculates the amount of the transfer to an average retiree. An American man retiring in 2011 could expect to receive Medicare benefits worth $170,000 (in 2011 dollars). If he had worked from age 22 at the average U.S. wage each year, he would have paid Medicare taxes (plus interest) worth $60,000 (also in 2011 dollars). So the average male worker retiring in 2011 will receive benefits worth almost three times what he paid in. And the transfer to that retiree will be $110,000 from younger Americans, perhaps including his grandchildren.
If that average worker had a wife who didn’t work, she would receive $188,000 worth of benefits, despite having paid nothing in. So the couple’s benefits are six times what was paid in, or a $298,000 transfer from younger generations.
A bill introduced in the House last year by Reps. Jim Cooper (D-Tenn.) and Paul Ryan (R-Wis.) would require the federal government to provide all adult Americans with an annual, personalized calculation of these numbers. As with the annual letter showing what we have each paid into and can expect to get out of Social Security (to save postage, these are no longer sent out but are made available online), this would alert each of us to the amount of benefits we are expecting from younger Americans.
Would Americans be as satisfied with Medicare if we were reminded each year about the hundreds of thousands of dollars that our retirement will cost our grandchildren?
The good news is that this problem is fixable. Other countries spend far less on health care and have better health outcomes. Reform of our health-care system would dramatically reduce the cost of future Medicare benefits and reduce the tax burden on future generations. But Americans are angry with their elected leaders, and they lack the information critical to understanding the need for change.
Our toxic politics are not helped by our government’s dubious accounting standards and poor disclosure. We deserve better information and an honest discussion of our choices.