By Dr. Merrill Matthew - IPI Resident Scholar
Social Security and Medicare are going broke primarily because of the way the system is structured. In a normaland therefore actuarily soundretirement account benefits are dependent on contributions plus interest or earnings.
Not so in Social Security and Medicare; they are considered social insurance" and both the contributions and benefits are capricious arbitrary and … political.
As Eugene Steuerle and Stephanie Rennane of the Urban Institute demonstrate:
A single male who makes the average wage his entire working life until retiring at age 65 in 2011 will have paid into Social Security $299000which includes the government (allegedly) paying a 2 percent interest rate. He can expect to receive about $266000 if he lives the roughly 15 additional years the actuaries say he will after turning 65.
A bad deal right? Not so fast. That same man is expected to have paid $60000 in Medicare payroll taxes while receiving $170000 in health benefits.
So while the average single man loses $33000 in Social Security he gains $110000 in health care benefits.
A one-earner couple with the same average wage makes out like bandits. He will have paid in the same amount$299000$60000 = $359000but the couple can expect to receive $448000 in lifetime Social Security benefits and $357000 in Medicare for a total of $805000 in benefits.
By contrast the two-earner family making the average wage gets more back in benefits $913000 but also pays a lot more than the one-earner family in Social Security and Medicare taxes $717000. You might call it the entitlement programs working penalty."
Unlike a system where workers had their own personal Social Security and Medicare accountssupplemented by the government if they didnt make enoughthe current system bears little resemblance actual contributions so no one should be surprised if its going brokefast.
Todays TaxByte was written by IPI Resident Scholar Dr. Merrill Matthews.
