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Analysis illustrates big gap between Medicare taxes and benefits

By Ricardo Alonso-Zaldivar
Sunday, January 2, 2011; 9:07 PM

You paid your Medicare taxes all those years and want your money's worth: full benefits after you retire.

Nearly three out of five people said in a recent Associated Press-GfK poll that people who paid into the system deserve their full benefits - no cuts.

But an updated financial analysis shows that the amount workers have paid does not come close to covering the full value of the medical care they can expect to receive as retirees.

Consider an average-wage two-earner couple together earning $89,000 a year. Upon retiring in 2011, they would have paid $114,000 in Medicare payroll taxes during their careers. But they can expect to receive medical services - including prescriptions and hospital care - worth $355,000, or about three times what they put in.

The estimates by economists Eugene Steuerle and Stephanie Rennane of the Urban Institute think tank illustrate the huge disconnect between widely held perceptions and the numbers behind Medicare's shaky financing. Although Americans are worried about Medicare's long-term solvency, few realize the size of the gap.

"The fact that you put money into the system doesn't mean it's there waiting for you to collect," Steuerle said.

By comparison, Social Security taxes and expected benefits come closer to balancing out.

The same hypothetical couple retiring in 2011 will have paid $614,000 in Social Security taxes, and can expect to collect $555,000 in benefits. They will have paid about 10 percent more into the system than they are likely to get back.

Updated periodically, the Urban Institute estimates are part of an effort that Steuerle and others began several years ago to try to illustrate the complicated finances of Medicare and Social Security in a format that the average taxpayer could grasp. The Washington-based institute is a public policy center that focuses heavily on budget and economic issues. Its analysis is accepted among other policy experts in Washington, including economists in government.

Many workers may believe their Medicare payroll taxes are going for their own insurance after they retiree, but the money is actually used to pay the bills of seniors currently in the program.

That mistaken impression complicates the job for policymakers trying to build political support in the coming months for dealing with deficits that could drag the economy back down.

Health-care costs are a major and unpredictable part of the government's budget problems, and Medicare is in the middle. Recent debt-reduction proposals have called for big changes to Medicare, making the belt-tightening in President Obama's health-care law seem modest. Some plans call for phasing out the program, replacing it with a fixed payment to help future retirees buy a private plan of their choice.

Peel back the layers, and there are several reasons Medicare benefits and taxes are so out of line. First is the rapid rise in health-care costs.

A single woman who retired in 1980, after earning average wages throughout her career, could expect to receive medical care worth about $74,800 over the rest of her lifetime. A comparable woman retiring in 2010 can expect services worth $181,000. Those numbers are in 2010 dollars, adjusted for inflation so they can be compared directly.

Another reason is that payroll taxes cover most, but not all, of Medicare's costs. They are earmarked for the giant trust fund that pays for inpatient care.

Outpatient doctor visits and prescription drugs are paid for with a mix of premiums collected from beneficiaries and money from the government's general fund. Seniors pay only one-fourth of the costs of those benefits through their premiums.

The system has worked for 45 years, with some fine-tuning. But the retirement of the baby boomers, the first of whom become eligible for Medicare in 2011, threatens to push it over the edge.

Medicare covers 46 million seniors and disabled people. When the last of the boomers reach age 65 in about 20 years, Medicare will be covering more than 80 million people. At the same time, the ratio of workers paying taxes to support the program will have plunged from 3.5 for each person receiving benefits currently to 2.3.

"With Medicare, we are all still making out like bandits, shoving all those costs to future generations," Steuerle said. "At another level, we know that this system is totally unsustainable."

- Associated Press

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