I’m still being inundated with responses to my column last Friday, which explained that older Americans generally receive much more out of entitlements than they paid into the system. I wanted to address a few of the questions that have come up in reader e-mails.
1) Some readers asked about how much the analysis changed depending on how much workers earned. The Urban Institute’s model calculated expected benefits and taxes for several broad types of hypothetical beneficiaries, sorted by level of earnings, marital status and retirement year. I suggest checking out the full report, but in the meantime, here is one set of hypothetical beneficiaries, all in the cohort that turned 65 in 2010:
As you can see, in each of these broad categories of hypothetical workers, expected benefits exceed taxes paid, although Medicare is primarily responsible for the gap between the two.
Note also that the researchers assumed workers were employed every year from age 22 to 64, which is not true for all workers. So the calculations probably overstate how much beneficiaries had paid into the system.
2) Some people wrote in saying that duh, of course, old people didn’t pay for their own benefits; that’s the responsibility of the young, to subsidize their elders. And since today’s old people were once young and paying for their parents, they are entitled to the same benefits. Fair, up to a point.
As their nickname implies, baby boomers are a really large generation, relative to cohorts that immediately preceded and followed them. Here are estimates from the U.N. Population Division for the age distribution of the United States from 1950-2050. (Projections past 2010 assume that fertility and mortality rates stay about constant.)
So yes, baby boomers paid for their parents’ benefits, but there were a lot of boomers relative to the elderly folks whom boomers supported. Today the demographics work in the opposite direction. There are a lot of baby boomers, who also happen to be living much longer than previous generations, and oh by the way, health-care costs per person are also getting much more expensive. As a result, the burden of paying for the elderly is much greater per working-age American today than in the past.
None of this means that today’s younger generations should wholly abandon the entitlements that retirees and soon-to-be retirees expect; it just means we need to think more carefully about things like controlling health costs, especially if we expect government to continue providing any services other than supporting the elderly.
By the way, these demographic challenges afflict many other developed countries, particularly those with very low fertility rates and tight restrictions on immigration. Take a look at Japan in the chart below. By 2050, there will be 72 retirement-age people for every 100 people of working age in Japan.
Some countries have dealt with this issue by partially indexing retirement benefits to the old-age dependency ratio.
3) Finally, lots of people wrote me arguing that it’s not fair to compare Social Security/Medicare taxes paid to benefits received, since that tax money could have been invested in, for example, a savings account that paid interest over the years. As I noted in the column, the Urban Institute model actually did take this into account. The researchers used a “discount rate” of inflation plus 2 percent. You can find some more details about the researchers’ assumptions here.